- The Washington Times - Thursday, December 8, 2011

It still seems unthinkable to most Europeans, but a growing number of outside analysts and investors believe the eurozone is headed toward a breakup as fast-moving market turmoil and a looming recession threaten to overwhelm the slow-motion response of European leaders.

German Chancellor Angela Merkel and other European heads of government dismissed such dire scenarios as they headed to a much-hyped summit Thursday in Brussels that appeared likely yet again to dash market hopes for a grand solution that would stop the financial hemorrhaging on the Continent.

But Moody's Investors Service, a top Wall Street rating agency, warned about the possibility of disintegration for the first time this week, as the deteriorating economy and increasingly stressed financial conditions after two years of crisis put pressure on countries to abandon their debts and leave the union.

A majority of global investors now think that at least one European country will quit the 17-member monetary union in the next year - most likely Greece, according to a Bloomberg survey of those investors.

Nearly half of investors expect other stricken countries in Europe - such as Portugal, Ireland, Spain or Italy - will be forced into default because of sharply increasing market interest rates on their debt, driving one or more of them out of the union as well.

“The eurozone debt crisis has entered a decisive stage and investors are increasingly questioning the euro’s survival” less than 10 years after leaders on the Continent launched the fledgling currency with much hope and fanfare, said Vassili Serebriakov, currency strategist at Wells Fargo Bank.

While a “full breakup” for the monetary union is unlikely, he said, a partial breakup is plausible and the risks of disintegration have grown high enough that investors are preparing for the possibility and staying out of European markets.

European leaders, who shun talk of a breakup and appear to have made no contingency plans, argue that the European public wants to keep the euro, which has brought many benefits, and people are prepared to suffer through a period of recession, austerity and turmoil to do so.

Moreover, they say the budget austerity and competitiveness-enhancing economic reforms that Greece and other debt-strapped countries have pledged to adopt to stay in the currency union may be painful, but leaving the eurozone would visit even worse economic and financial consequences on them.

Any exiting country likely would be unable to repay debts denominated in euros, for example, since the debt payments would quickly become too expensive as the country’s own currency rapidly falls against the euro. That would lead to widespread defaults on loans and the likely collapse of the country’s banking system, European officials say.

“Has anyone thought about the day after?” when many citizens of Greece, for example, would be pulling all their money out of the banks, causing a run on the banking system, asked Gabriel Glockler, deputy director at the European Central Bank.

Europeans don’t view the currency as an experiment that’s dispensable if it isn’t working, the way many Americans do, he said.

“There’s deep attachment to the single currency” in Europe, he said, with opinion polls showing even 75 percent of Greek citizens want to stay in the eurozone despite hard times and growing social unrest. “It’s not something you give up frivolously,” he said.

The euro had a promising start in 2002, gaining strength rapidly and within only a few years becoming an important world reserve currency, second only to the U.S. dollar. Those strengths provided big benefits for Europeans, conferring an aura of wealth and power, substantially boosting their purchasing power and making it easy to borrow at very low interest rates.

But for some European countries such as Greece, the easy borrowing terms encouraged overborrowing and overspending, leading to the current debt crisis. Moreover, while the euro system performed well when the economy was growing, the founders of the euro did not establish institutions to counter the kind of recession and crisis that is racking the Continent today.

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