For the euro area to survive, it might be necessary to restrict it, writes Bloomberg.
With the debt crisis approaching its third year, and financial support efforts doesn’t seem to be successful, some economists argue that, for the euro area to survive, some of its members will have to leave.
The result would be what Mohamed El-Erian, CEO of PIMCO – the largest bond fund in the world, depicts the image of “a smaller Euro zone, but more integrated and stronger from a financial standpoint”. Although leaders like German Chancellor Angela Merkel rejected this option, El-Erian said that they could embrace the idea, against the financial union, required to ensure the integrity of the monetary union.
“We were warned by European policymakers to not underestimate ever their commitment to economic and monetary union, but this can also be interpreted in the meaning that they could choose quality over quantity”, says Stephen Jean, from SLJ Macro Partners LLP.
Martin Feldstein, a professor at Harvard University, warned that the euro could have difficulties because divergent economies can’t be held under the same monetary roof. Any exit may take place based on mutual understanding, appreciate Feldstein.
Joachim Fels, chief economist of Morgan Stanley, wrote at the beginning of the crisis that Germany would conclude that it would be better with a smaller monetary union, but stronger. Paul Krugman, Nobel laureate, recently said that there are more than 50% chance that Greece will leave the euro area and 10% chance that Italy will do the same.
Differences in the rate of growth of the country economies and the likeliness for the member countries to prove reluctant to continue bailout efforts, will make a division of the euro area by 2013, according to a report by the Centre for Economics and Business Research. So far, European leaders reject the idea of restricting the euro zone. This is because the benefits still exceed the disadvantages of the union.