IMF says euro under ‘a shadow,’ signals that currency union may be in jeopardy

ROME — The International Monetary Fund said Tuesday that the euro, a currency born a decade ago out of the post-World War II urge to knit Western European nations more closely together, was under “a shadow” and hinted it might not survive the current battle over government debt.

With European leaders struggling to agree how to divide the costs of another Greek rescue program, the IMF said there was “no consistent road map ahead, leaving both orderly and disorderly outcomes on the table. . . . The reaction by national authorities and economic agents has been one of retrenchment, threatening to turn back the clock on economic and financial integration, the very foundation” of the Economic and Monetary Union (EMU).

Graphic

Explore the factors that work to spread a financial crisis and how they are linked in Europe.

Gallery

 Cutbacks demanded by international lenders have led to a public backlash, with tens of thousands of Greeks flooding into the main squares of cities across the country.

More on this Story

• IMF says euro is under 'shadow'
• Klein: The dangers of being wrong on Keynes
• Debt ceiling crisis eludes compromise
• No quick fixes for housing market

View all Items in this Story

• Bank of America, Wells Fargo, and Goldman Sachs report earnings
• Warren: 'Wicked smart' and on her way out
• More from Post Business

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.”