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Whither the euro?

German Chancellor Angela Merkel has finally secured a new rescue package for the Eurozone’s struggling economies, propping up her own domestic position in the process. In the event, the Bundestag vote was more convincing than expected, with 523 votes in favour of increased German support for the European Financial Stability Facility (EFSF), with only 85 against. The ruling Christian Democratic Union and is partners did not even need the support of opposition parties, so the message was clear: Germany still fully supports the European project and will not allow the euro to fail.

Yet increasing the size of the EFSF from €440 billion to €780 billion appears to be too little too late. Greece’s economic woes show no sign of fading, while Italy moves ever closer to the precipice of economic disaster. Perhaps most importantly, the markets took little heart from Merkel’s victory and it is worth noting that stock markets within the Eurozone, including Germany’s Dax and France’s Cac 40 suffered greater losses following the German vote, than those, such as London, on the outside.

The euro was always an ambitious venture. Bundling a wide range of different economies within a single currency, without the benefit of the economic and fiscal levers of a nation state, looked difficult in the extreme. Yet subsequently allowing some member states to run up huge debt to GDP ratios – above 100% in Greece as early as 2000 – has almost turned it into mission impossible.

We must say “almost” because for political leaders in several key European states, the euro and ever closer European integration is the only game in town. For the vast majority of French and German politicians since the 1950s, there has been no option other than ever closer regional economic integration, coupled with a slower pace of political integration. Eurosceptics in the UK and Denmark may have railed against the loss of national sovereignty but Franco-German co-operation was underpinned by the active support of the Benelux nations and the more passive acquiescence of Italy.

There are no other realistic options on the table if the European Union were to collapse, and so this will not be allowed to happen. Similarly, political parties across the continent have so much political capital invested in monetary union that the euro will not be permitted to fail, even at the stake of prolonged economic weakness over several years. Yet the behaviour of the markets suggests that they believe that the weaker members of the Eurozone could be picked off. The names and numbers remain to be decided but Berlin, Paris and possibly even Brussels may conclude that enough is enough and that it is time to sort the wheat from the chaff. Some depict the EU’s current currency and economic woes as signs of a battle for the survival of the euro. The currency looks fairly certain to survive but perhaps not in every member state.