Will the Euro Currency Fail? – Challenges of the Eurozone in a Post-2020 World

The Long and Winding Road: EU's Litany of Challenges

The European Union (EU), an alliance steeped in history and camaraderie, has had to navigate a labyrinth of problems over the years. Prominent banking issues have put a strain on the EU's financial stability, with reputable establishments like Deutsche Bank AG and Credit Suisse Group AG mired in controversy. The trouble, however, didn't stop at the banks' doors. Italy's key financial players have also grappled with deep-seated banking crises, causing the economy to teeter on the brink of a breakdown.

Greece's debt crisis adds another layer to this complex puzzle. The country found itself in the vortex of an economic tempest, further intensifying the EU's struggle to maintain equilibrium.

In 2016, the Brexit referendum rocked the boat even further. The United Kingdom's choice to bid adieu to the EU brought with it a wave of financial uncertainties. Even though the UK maintained its own currency, the British pound, separate from the euro, Brexit still managed to unsettle trade discussions with EU member states.

The European Central Bank (ECB), in response to these circumstances, embarked on a drastic measure—implementing negative interest rates. This bold move was aimed at breathing life into the stagnant economy. Remarkably, for several years, the European economy showed signs of resilience and recovery. However, the path forward for euro-based countries remains steeped in challenges.

The Fallout from the 2020 Crisis: Euro-Based Countries in Turmoil

Eurostat, the reliable pulse of the EU's economic health, reveals a tale of growth and decline. The agency's statistical analysis shows that from 2014 to 2019, the eurozone's economy expanded by an estimated 2-3% annually, as evidenced by the Gross Domestic Product (GDP) data. The GDP, which denotes the aggregate production of goods and services in an economy, painted a rosy picture of the eurozone's economic standing in 2017.

That year, the eurozone hit a high note, enjoying its best year in a decade. Countries still reeling from the aftermath of the 2008 Great Recession finally saw a silver lining—unemployment rates began to dwindle, and their economies gained strength.

But just when the eurozone was gaining momentum, a new specter rose on the horizon—the 2020 financial crisis. This unprecedented crisis severely bludgeoned the eurozone's economy, causing the GDP growth rate to plunge by approximately 12% in the second quarter of 2020. To add insult to injury, unemployment rates soared to 7.8% by June 2020. Although these figures mark an improvement from the more than 12% unemployment rate in 2013, they underscore the serious economic challenges that the eurozone continues to face.

The Potential Domino Effect of a Collapsed Euro

A cascading euro might trigger a domino effect, knocking down the pillars of the Schengen Agreement. Under the Schengen Agreement, coined after its 1995 inception, 26 disparate European countries consented to create the "Schengen Area." This enabled the free movement of:

• People
• Goods
• Services
• Capital

These elements could flow unimpeded within the eurozone's borders. Notably, not all EU members are also members of the Schengen Agreement and vice versa, but a euro breakdown would nonetheless impact countries both inside and outside of these agreements.

An economic zone can theoretically tolerate competing currencies. For instance, Germans and Italians could potentially trade in both German Deutsche marks and Italian lira. However, such a scenario is unlikely, as the termination of the euro could fuel a drive to dismantle the entire EU structure.

If the Schengen Agreement crumbled, countries in the eurozone would be compelled to enforce border controls, checkpoints, and reinstate the myriad regulations that were once discarded. The financial repercussions of such a move would reverberate through private enterprises, especially those involved in continental transportation or tourism.

How a Collapsed Euro could Reshape the Global Economic Landscape

The economic benefits that currently exist within the EU may not extend to external trading partners, which makes predicting the fallout of a euro collapse challenging. In the initial stages, markets may react unfavorably due to the uncertainty that this introduces. However, in the long run, markets could witness a silver lining—a Europe that is growing once again. Historically, Europe has lagged behind other regions like the Americas, Africa, Asia, and the Pacific in GDP growth. If a post-euro world manages to steer Europe back on the path of competitive economic growth, it is likely that the global economy will reap the benefits.

Transitioning Back to National Currencies: A Bumpy Ride Ahead

The transition from the euro back to a nation's original currency is a process referred to as "redenomination." This path, while seemingly less labyrinthine than the initial adoption of the euro, still presents considerable uncertainty. The switch would demand two broad changes:

1. Official adoption of a new currency within a nation's boundaries: This would involve adjusting present wages, prices, and other financial markers to the new currency on an approximately proportionate basis.
2. International value of the currency would need to be priced into the foreign exchange (forex) markets: This would hinge on a variety of factors, including the nation's economic prospects and the international community's faith in the currency's future.

Certain nations, such as Greece, buckling under the weight of foreign debts, may consider redenomination as a potential lifeline. Redenominating their debt into a currency that they control could offer an easier path to paying off these obligations. Nevertheless, such moves could stir up turmoil in the devalued country's economy.

The Potential Ramifications on Banking, Forex, and Global Trade

The demise of the euro would signal a significant shift in monetary policy, effectively returning the reins of monetary control back to the member nations. Banks would need to recapitalize in their national currencies and handle more active forex balances, dramatically shifting the landscape of global banking.

Moreover, the euro's abolition could alter the relative values of assets held internationally and reshape income levels in different European job markets. However, other changes could also occur, as policies concerning immigration or trade could be further restricted if the euro fails. These could potentially disrupt economic stability in the short term, necessitating swift and decisive responses from European leaders.