Euro debt crisis 101: What can Merkel, Sarkozy plan accomplish?

German Chancellor Merkel and French President Sarkozy are pushing eurozone reforms to mandate greater fiscal discipline in Europe. But is that enough to begin reversing the eurozone crisis?

2. Is the eurozone at risk of breaking apart? And what about the euro as a currency?

The eurozone has always been a political project as much as a monetary one. Germany and France have been the driving forces. Apart from the legal and economic implications, giving up on the eurozone would mean a huge loss of political capital that Chancellor Merkel and President Sarkozy are determined to avoid, according to Ferdinand Fichtner from the Berlin-based German Institute for Economic Research (DIW). “Germans and Frenchmen appreciate the integrating power of the common currency. They won’t throw that away easily.”

If the crisis is not solved though, the euro risks losing credibility as a reserve currency. It has lost some of its shine already, says Mr. Fichtner, but profits from the weakness of the dollar.

“It would have been better to start the eurozone with fewer members,” says Wohlgemuth. “Now it is virtually impossible to exclude anyone – there is no legal basis for it. And the economic consequences for any country leaving the euro would be devastating. Any speculation about such a move would cause people and investors to withdraw their money, the banking system in such a country would collapse.”

Leaving the eurozone would not solve debt problems either – in fact, it would enhance them. If Greece for instance was to return to its old currency, the drachma, it would still have to serve creditors in euros. A sovereign default would be inevitable.

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