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Euro Breakup Talk Increases as Germany Loses Its Currency Proxy

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James G. Neuger
Bloomberg News
Friday, May 14, 2010

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.

German officials are already debating what was unthinkable to the euro’s architects: that a currency union designed in its founding treaty to be “irrevocable” might not be. Finance Minister Wolfgang Schaeuble said March 12 that expulsion from the euro may be the ultimate penalty for serial violators of debt rules.

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Euro Breakup Talk Increases as Germany Loses Its Currency Proxy 130510banner3

Under current EU law, ejection is “legally next to impossible,” the ECB said in December. Changing the treaty requires unanimity among the EU’s 27 governments, so the euro’s current lineup — likely to be joined by Estonia next year — will have to find a way of making do.

Markets have rendered a mixed verdict on the euro’s resistance to the crisis. The currency’s decline below $1.25 from a record high of $1.60 in July 2008 still leaves it above the 1999 starting rate of $1.17. The euro is about 11 percent overvalued against the dollar, data compiled by Bloomberg of purchasing power parities show.

Full story here.

This article was posted: Friday, May 14, 2010 at 8:39 am





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