The Euro Debt Crisis: Possible Scenarios for the Eurozone's Future - dummies

The Euro Debt Crisis: Possible Scenarios for the Eurozone’s Future

By Julian Knight

Some financial analysts think the Eurozone should stay like it is, with 17 member nations. But many believe that countries with such different sized economies (like Germany and Greece) simply cannot share the same currency. These people think that weaker members of the Euro should leave for the greater good; they can reintroduce their own currencies, devalue them, and then boost economic growth.

As of this writing, who’s to say which option is most likely to play out. Here are a few possible scenarios that could end the European debt crisis:

  • Nothing changes, and The Eurozone muddles through: This is the option favored by most politicians. The hope is that the stronger nations, like Germany, will come to the rescue of the weaker ones, and the stronger nations will be patient while the weaker ones sort out their government finances. To this end, the European Central Bank, which administers the Euro, has been buying the government debt of the most troubled countries (including Portugal, Ireland, Greece, and most recently, Italy).

  • A limited breakup of the Euro: Under this scenario, countries such as Greece, Portugal, and Ireland would leave the Eurozone and issue their own currencies again. The rest of the Eurozone continues would remain on one currency. The danger associated with this possible plan is that the already weakened countries who leave would face a greater risk of economic collapse, which would have a damaging effect on all of Europe’s banks, who collectively own these countries debts.

  • A substantial breakup of the Euro: In this scenario, not only would the weakest nations leave the Eurozone but so would a couple larger countries, for example, Italy and Belgium. The only nations left in the Eurozone would be the strongest. This would be tough for Europe, as a whole, to recover from, but it’s still a far better scenario than the one below.

  • A full breakup: All bets are off, if this occurs. Every country would go its separate way, and re-issuing its old currency. This could lead to widespread chaos or worse — economic panic not seen in Europe since the Second World War. What follows could be a handful of governments starting to default on their debts, which could lead to a collapse of the banking sector.

Most Politicians in the Eurozone are desperate for it to stay together. The single currency took years in the planning and is about more than simply notes and coins. For many, the Euro represents a political ideal and will assure peace and joint prosperity throughout the continent of Europe.

Although all members of the Eurozone are meant to be equal, some are more equal than others. Germany and France have, by far, the largest economies in the Eurozone and they wield the most influence; while countries like Malta and Estonia have very small populations and economies, and therefore have little influence on events.