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Special Report: Europe and the Euro (Part 4)

Written by Brad McMillan, CFA®, CFP® | Aug 16, 2012 2:52:45 PM

Europe, the Euro, and the Possible Failure of Political Integration

Yesterday, I discussed what success would look like for the eurozone and the European Union. In my opinion, success is a long way away, and in many respects, failure is looking a lot more likely.

For the purposes of this discussion, I will define failure as the rejection of the euro by enough of the participating countries to make its continuance impossible. This definition means that it is not failure if one or several countries leave and the euro continues. In my opinion, Greece will leave sooner rather than later, but that will not result in the failure of the euro. In fact, if Greece or other outlier economies leave, the success of the remainder could become more likely, as the gap that has to be covered by a federal structure would be reduced.

Failure could be the result, however, if Germany were to leave. Germany is the financial and manufacturing linchpin of Europe, and a euro without Germany is pretty pointless. Failure could also result from a French departure. Although France is much weaker economically than Germany, it is still the second largest economy in the eurozone, and it is politically at the center of Europe. Again, a French exit would make the euro pointless.

The case for the remaining large economies—Spain and Italy—is less clear to me. From an economic point of view, a eurozone of the northern, more solvent economies makes a great deal of sense. The northern countries have many of the characteristics outlined above for success, and eliminating the weaker Mediterranean economies would help the eurozone economically and culturally. Politically, however, Spain and Italy are probably as essential as the stronger countries.

Tomorrow, we’ll explore why these countries would stay, the potential consequences to them if they were to leave, and what would cause them to exit.