Is This The Beginning Of The End For The Euro?

Could the single currency region be forced to break-up?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This time last week, we were reliably informed by sources in the know that a deal to keep Greece in the Euro was around 90% of the way there. Apparently, there was broad agreement on the measures that would need to be implemented in order for Greece to remain in the single currency region and that, while nothing had been signed, formal agreement would come in only a matter of time.

As a result, the stock market rose by a couple of per cent and investors began to wish that they had taken the opportunity to buy in at a relatively low level. Today, though, it feels as though we are back at square one, with talks between Greece and its creditors apparently stalled.

Inevitable Result

Of course, Eurosceptics will say that the current predicament is inevitable. They will say that the Euro was a disaster waiting to happen, with the ambitious project being undertaken for political, rather than economic, reasons.

And, with the performance of the Eurozone having being so poor in recent years, there may be some truth in this view. Whilst the US and UK have seen their economies come through a challenging recession, the Eurozone has barely been able to register positive growth.

Clearly, the Greek debt predicament is about more than weak economic growth. Greece’s peers have, with hindsight, been too tough with their dose of austerity, with the country’s economy shrinking by 25% since the start of the global financial crisis.

That’s roughly the same as the US economy declined by during the 1930s and, as a result, it is little wonder that Greeks have voted in a party, Syriza, that has promised to put an end to the misery that austerity has brought.

Austerity

However, Greece’s creditors continue to push for further austerity and, as such, Syriza appears to be unable to accept the terms. In other words, they were voted in on an anti-austerity manifesto and so are finding it difficult to agree to the terms being offered. This seems to be a reason for the surprising announcement of a referendum, as Syriza seeks to put the best terms they are able to negotiate to the Greek people for them to decide.

Of course, Syriza is also pressing for policies that are unlikely to help Greece’s economic outlook. Policies such as increasing corporation tax and tax on higher earners are likely to disincentive risk-taking and enterprise in a country where confidence is already in short supply. And, put simply, taxing corporate profits more heavily means less investment, fewer jobs and, in the long run, reduced tax receipts.

Looking Ahead

Clearly, both sides have much to lose from there being no deal. Creditors risk losing €billions and Greece risks yet more economic turmoil. And, if Greece does leave the Euro, then it could act as a stimulus for anti-austerity movements in other countries across Europe to win votes and seek to exit the single currency region, too. As such, and while the outcome of the referendum is impossible to forecast, the outlook for the Euro remains bleak.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »