Nearly two years after a crisis that began with the disclosure of Greece’s inordinate levels of public debt, and with three euro-zone governments now under IMF programs, the comments in a report released Tuesday mark the agency’s most explicit statement that the 17-nation currency union may be in jeopardy.
European leaders are set to meet in Brussels on Thursday amid renewed doubt about their ability to craft a durable fix for the euro. The London-based Capital Economics consulting firm has dubbed the summit the euro zone’s “last chance saloon.”
Leaders have ruled out a breakup of the euro zone as unthinkable. Such a move would end ambitions for a European currency to challenge the dollar as a world reserve and, depending on which countries would leave the currency union, possibly force a major reordering of world finances.
But a breakup has nevertheless been a staple part of the discussion since Greece’s problems became acute in the fall of 2009. Some analysts see the outcome as inevitable in a region where economic performance is diverging: Either stronger economies such as Germany will leave to protect themselves from paying for a succession of bailouts, or weaker ones will want to regain control of their own currency and monetary policy.
The inability of leaders to agree on a course of action has hardened those views.
Those leaders approved hundreds of billions of dollars last year for a bailout fund, ensuring that Greece, Ireland and Portugal could keep paying their bills. But it was not considered adequate for the scale of Europe’s problems — weak banks, weaker public finances, tangled governance and lagging growth, problems that have as much to do with economic structure and culture as with the availability of cash.
A breakup would be costly. In a study presented to the IMF, ING chief economist Mark Cliffe estimated that Greece’s economic output might fall as much as 10 percent if it pulled out of the currency union. Output throughout the region would also fall sharply.
But the risk, with each week of unresolved crisis, seems more concrete. The IMF has cited the euro zone’s problems as perhaps the chief risk to the global economic recovery. And analysts at Capital Economics said “a very decisive response which could be applied not just to Greece but also to Spain and Italy” was essential. Otherwise, they said, the situation could become “irretrievable.”