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.
The European Central Bank, for example, has only one mandate, to guard against inflation - usually only a problem in booming economies. But it has no mandate - like the U.S. Federal Reserve does - to promote economic growth in times of recession or maintain financial stability in times of crisis.
That has led to considerable frustration and convulsions in financial markets, which have looked futilely for signs that the bank will move vigorously to ease the stress in Europe's debt markets.
The bank disappointed financial markets again Thursday when it moved to forestall a widely predicted recession by slashing interest rates, but denied that it had plans to go further to calm debt markets by purchasing more of the debt of stressed countries like Italy. The news helped drive the Dow Jones industrial average down by nearly 200 points and sent Italy's stock market plummeting by 4 percent.
Critics say that while European leaders are trying to address their institutional shortcomings in a piecemeal fashion at a succession of summits establishing new rules to discourage budget deficits and create institutions to deal with crises, measures taken so far do not go far enough to ensure stability and growth.
Peter Morici, business professor at the University of Maryland, said the latest Franco-German plan to impose strict deficit limits would actually promote recession by forcing governments to try to balance their budgets in the teeth of an economic downturn. That will only cause further economic contraction and higher deficits, he said, and "will thrust Europe into a deeper economic crisis."
Beyond the institutional weaknesses in Europe, many economists argue that Greece and other debt-burdened countries would be better off going back to their own currencies, because that would let them devalue the currency to stimulate export growth and domestic industries that are currently displaced by imports.
The strategy of currency devaluation, which helps to make a country more competitive in global trade, is not possible for individual nations participating in the European monetary system. Such a strategy has been an important part of reform programs administered by the International Monetary Fund, however, in other crisis-stricken countries.
After studying the mind-numbing complexity of the European system and its handling of the long-running crisis, Wall Street rating agencies are warning of a possible breakup without major change in Europe.
Europe "is approaching a junction, leading either to closer integration or greater fragmentation," said Alastair Wilson, managing director at Moody's. Despite the "tremendous economic and financial strength" in Europe, "institutional weaknesses continue to hinder the resolution of the crisis."
"The probability of multiple further defaults is no longer negligible," he said. "A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area."
Despite the increasingly dark outlook, Moody's said Europe may keep muddling through as it has so far, lurching from crisis to crisis while piecing together reforms in a painfully slow political and legislative process, but nevertheless avoiding the dissolution of the monetary union.
But Mr. Wilson said that even if European leaders avoid a breakup, it will take a further "series of shocks" that results in more countries losing their access to the credit markets and needing bailouts before political leaders muster the will and resources to resolve the crisis.
Andrew Milligan, head of global strategy at Standard Life Investments, also expects Europe to keep muddling through, but he is recommending that investors stay "light" in European investments until the crisis is resolved.
"We assume that the European Monetary Union will survive and that no country leaves, as the economic cost for departing is currently too great," he said, but many bumps will happen along the way before stability is achieved. "All in all, we see continued small and large crises in Europe for some time to come."
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