Break-up or two-tier: eurozone faces dire choices
Germany and France, desperate to prevent the crisis from bringing down their economies, are rushing to draw up a battle-plan for an EU summit next week that could lead to a new phase in the two-year-old crisis.
As the debt crisis spreads to Italy and Spain, no country seems safe anymore, not even the French-German economic giants.
Ratings agency Moody’s sounded alarm bells Monday, saying the credit standing of every European nation was now at risk of a downgrade while the danger of "multiple" defaults, and ensuing exits from the eurozone, persists.
The message was clear. Even the eurozone’s elite group of top-rated countries — Germany, France, Finland, Luxembourg, Austria and the Netherlands — are not immune from debt contagion.
"In terms of the policy framework, the euro area is approaching a junction, leading either to closer integration or greater fragmentation," the US-based agency said.
In Britain, banks are even drawing up plans for the possible dismantling of the eurozone as part of their risk planning, Britain’s financial watchdog, the Financial Services Authority, said last week.
German Chancellor Angela Merkel and French President Nicolas Sarzkoy issued their own dire warning last week after crisis talks with new Italian Prime Minister Mario Monti.
If Italy collapses under its nearly 2.0-trillion-euro debt mountain, Merkel and Sarkozy warned that it would spell "the end of the euro," Monti’s office said in a statement.
To save the euro, Paris and Berlin want tighter economic governance and discipline through changes to the EU treaty.
This is the route favoured by Germany, which has rejected French pleas to allow the European Central Bank to act as lender of last resort like the Federal Reserve in the United States.
"We are working intensively on a stability union," a German finance ministry spokesman said Monday, denying a report that Berlin also wants to create "elite bonds" to only pool the debt of the top-rated nations.
Germany and France have not ruled out moving ahead with a limited number of eurozone nations if others refuse.
Sarkozy warned last week that if the treaty changes are resisted, "we have another strategy" through "inter-governmental agreements" that could exclude the reluctant nations.
A European diplomat said the goal is to agree a new treaty among the European Union’s 27 members, but if that proves too difficult the 17 euro area nations would do it on their own.
"The idea is not to have an agreement with just a few eurozone countries but between the 17 nations. However, if one or two countries from the monetary union do not want to participate, we will not be held back by them," the diplomat said.
Some fear such plans would create a two-tier eurozone, with the most resilient economies thriving in one corner and laggards such as Greece playing catch up while living off their wealthier neighbours.
"It is unimaginable to have an exclusive group" within the eurozone, a diplomat said.
The European Commission rejected any option that would break up the eurozone.
"If the final goal is to safeguard the stability of the eurozone, it is obvious that a fragmentation does not serve this objective," said commission economic affairs spokesman Amadeu Altafaj.
"Every proposal must be based on preserving the unity of the eurozone."
In a note to clients, Swiss bank UBS said the eurozone "should not exist" in its current form.
"Either the current structure will have to change, or the current membership will have to change," the bank said in a note to clients that estimated the cost of a break-up.
For a weak country, leaving the club would cost between 9,500 and 11,500 euros per person the first year alone, or 40-50 percent of GDP. For a core nation like Germany, the cost would be 6,000-8,000 euros in the first year.
AFP/ Laurent Thomet