Quo vadis euro?

The second parliamentary election in the past 50 days in Greece will take place on June 17. The country is an economic tinderbox: a new survey or a careless statement by some politician could be enough to prompt Greeks to withdraw their money from their bank accounts even faster than they already have.

"I can imagine that the situation will get worse before the election," said Martin Hüfner, chief economist at Assenagon Investments in Munich. Capital controls will probably then be imposed overnight. "I am certain that people in Athens, at the European Central Bank and in Brussels have long been pondering them," Hüfner told DW.

Not another euro to Athens

Until a new government has been established in Athens that will stick to the requirements of the aid package agreement, no more money should flow in that direction, Hüfner said. Euro partners likewise do not want to help out with further billions until the so-called troika - the European Commission, the European Central Bank and the International Monetary Fund - confirm that Greece is adhering to austerity policies.

If the next tranche does not arrive, Greece first faces insolvency and then an exit from the eurozone at the end of June. A collapse of banks, a weakening economy and social unrest could be the result. But it doesn't have to come to that. According to Thomas Mayer, chief economist at Deutsche Bank, Greece could run two currencies at the same time for a while. Rather than salaries and pensions, Greeks could receive debentures that they could trade amongst themselves and use to cover their everyday needs. Mayer calls the debentures "geuros" - Greek euros. "That would be one solution for being able to partially separate from the euro. It's probably the lesser of two evils," Mayer said.

Financial markets are meanwhile viewing Greece as the lesser problem for the eurozone, with Spain having long ago tipped the scales. The eurozone's fourth largest economy is suffering from its faltering bank sector, where ever greater problems are revealing themselves after the real estate bubble burst.

Experts mixed over the situation in Spain

"Anyone with common sense would say that Spain should also dip into the bailout fund," Hüfner said. "Interest rates have risen dramatically. The country simply doesn't have any more money." He said Spain would just have to swallow its national pride and accept the situation.

Deutsche Bank's Thomas Mayer does not see the situation as so oppressive. "Spain has options," he said. "On the one hand, Spain could take loans at 6.5 or seven percent on the market in order to recapitalize its banks." Spain has spent more in the past. If that still proved to be too much, the country could take advantage of European aid to restructure the banks later. Spain would then only have to accept conditions for the banking sector, and not for the entire economy, Mayer told DW.

While Spain is still making a fuss, there is no doubt anymore that the bailout strategy up to now, which lopsidedly relies on spending restraint, has failed. Most eurozone countries are moving further and further into a recession. A shrinking economy means lower tax revenues and an even higher debt ratio.

Flexible fiscal rules

"Europe needs flexible fiscal rules," Dennis Snower, president of the Kiel Institute for World Economics, wrote in the Sunday edition of the Frankfurter Allgemeine Zeitung. Those countries affected by recession should be given the flexibility to boost their economies through government expenditures and tax cuts, Snower said. He added they could also draw on the EU's structural funds and the European Investment Bank.

Hüfner goes so far as to propose an additional investment budget for states in crisis. This would have to comprise at least 1 percent of the country's GDP, making both euro bonds and project bonds unnecessary. The markets would fund national programs once it became clear they improve the situation, he says.

But there's no getting around a political union to ensure the euro's long-term existence. Hüfner urged EU governments to gradually acquire legitimization for a "common currency with all consequences." Former German Chancellor Helmut Kohl said a popular vote on the euro would fail, so it shouldn't take place. The diagnosis may have been correct, but the conclusion isn't," he said. "We need the people's support."

Collapse of the eurozone?

The chance that the euro will fail stands at fifty-fifty, Hüfner says. Perhaps states will have to return to their national currencies - a move Thomas Mayer strongly discourages. The common currency union's reversal costs would be enormous and as far as currencies are concerned "Europe would fall back into regionalism. Even then, there would be no real independence in monetary policies," Mayer said. Europe would again become dependent on everything happening outside of Europe, he warned. "There would be little chance of individual countries disconnecting at least their currencies," Deutsche Bank's outgoing chief economist said.

Splitting the currency union into a northern and a southern zone is also not realistic, Hüfner said: "That is a construction that is not feasible politically. Germany and France would most probably have to separated." And then, he concludes, political cooperation in Europe would become very difficult - if not impossible.

Author: Danhong Zhang / als / db
Editor: Simon Bone