New clouds are gathering over the eurozone.
Ireland has turned to the European Commission to seek support for its revised budget-cutting plan. Olli Rehn, the European commissioner for economic and monetary affairs, is going to Dublin to discuss the new Irish budget cuts, amounting to 3.6 percent of GDP. The move aims at convincing the bond investors that are currently reluctant to buy Irish bonds. The word “bailout” hangs in the air.
Portugal plans a 5 percent cut of public sector wages and an increase in value-added tax (VAT) by 2 percentage points to 23 percent. Greece’s austerity plan is not working as planned, as budget revenue has grown below expectations.
On top of this the US has, with its second wave of quantitative easing (QE2), practically cornered the eurozone. QE2 should bring new upward pressure on the euro, further undercutting the competitiveness of eurozone exports.
All this tell us that the eurozone is still in serious trouble. Even if governments in the periphery manage to escape the bailout scenario for now, in the medium turn their position remains quite unsecure. That is why it’s worth reading the somewhat disruptive analysis of Samuel Brittan (free FT subscription required) on the imminent death of the euro. Mr. Brittan says that the current battle to save the euro resembles the unsuccessful struggle from 1961 to 1967 to stave off sterling devaluation. A cycle of rescues and new crises ultimately ends with acceptance of the inevitable.
Now, I have discussed the possible breakup of the euro before. This is a plausible scenario, but luckily not the only scenario. A breakup of the eurozone will deal a huge blow to the integration dynamic, and should be avoided. Hopefully all Member States understand that, but it remains to be seen whether key eurozone Member States act on this understanding.