With the European Central Bank struggling to prevent a sovereign debt crisis many are questioning the future of the single currency.
Yet Michael Story, an economist at investment firm Western Asset Management, reckons the currency will stay together and maybe even “gain status as a global reserve currency”.
Story, whose firm manages around $450bn of fixed income assets such as bonds, admits that the indebted, peripheral countries will not be able to pay back all of their debt. Yet he sees negotiations as “part of their efforts to remain members of Europe’s monetary union”.
Story thinks that for all the talk of a ‘New Drachma’, neither peripheral nor core countries want a member to leave the eurozone. If Greece left, it would have to “restrict deposit withdrawals, seal its borders, impose absolute capital controls and suspend operation of the bond market – actions that would likely be equally unpopular and far more damaging to the Greek economy than remaining inside the euro area”.
Even Germany, whose public shows opposition to financing repeated bailouts, do not really want to leave the euro, says Story. It has conferred tremendous benefits on the German export sector and is one of the reasons why the German economy is flush with surplus savings”. If anything, “Germany has been the biggest beneficiary of the euro”.
It’s not just eurozone members who want the project to succeed. Former soviet bloc countries like Latvia, Lithuania and Poland also want to join. They see membership as the final “destination of a long journey from an anachronistic command economy to a modern free-market democracy”.
The biggest threat could be the European Central Bank, he thinks. For the euro to survive, voters need “to forfeit more of their sovereign autonomy than most are currently prepared to do.” But the ECB’s decision to tighten rates may not make life easier – the move “is eroding what is left of the eurozone’s political legitimacy”, which is “the ultimate determinant of euro survival.”