Euro breakup – the warning signs

As a group of German University Professors prepare to challenge EU’s Greek bail out in Germany’s notoriously tough constituitional court, Morgan Stanley analyst Joachim Fels warns that Eurozone countries with a preference for price stability, led by Germany, may break away. He posits three signs indicative of a Eurozone break up

What are the signposts that would indicate our break-up scenario is in fact unfolding?

First, watch fiscal developments in other euro area countries closely: Our suspicion is that the aid package for Greece lessens other governments’ resolve to tighten fiscal policy, especially in an environment of ongoing economic stagnation or recession.

Second, watch ECB policy closely: If the ECB turns out to be slow in raising interest rates once inflation pressures return, this would be a sign of a politicisation of monetary policy.

Third, watch the political debate in Germany: Support for Greece has been extremely unpopular and fears that the euro will turn into a soft currency abound. If the aid package for Greece, which so far is a backstop credit line, becomes activated, eurosceptic forces would receive a significant further boost. And, needless to say, if other countries also needed financial support, this would further strengthen euro opposition.

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Related George Soros warns of European disintegration.