Blog Carsten Brzeski

Four Futures for the Eurozone

The Euro faces starkly different scenarios

Tomorrow, European leaders will celebrate the 60th anniversary of the Rome Treaties. The birth hour of the EU. It will be a celebration with a bittersweet taste as the future path for Europe has probably never been more unclear than today. In the current discussion, the former crown jewel of European integration, the Eurozone, is in our view often lightheadedly overlooked. Here, we present some possible scenarios for the future of the Eurozone and the potential impact for financial markets.

With the recent release of its White Paper, the European Commission has officially restarted the discussion on the future of Europe. A discussion deemed necessary after the Brexit vote. Judging from the discussions at the last European Summit in Brussels, many Eurozone leaders appear to be focusing on a multi-speed Europe. This is one of the scenarios presented by the European Commission. While a multi-speed Europe might be a way to keep the EU alive, it is far from certain what this really means for the future of the Eurozone. This future has recently been put in question, once again.

This time around, it was not Eurozone governments casting doubt on whether or not Greece should be bailed-out, nor was it the ECB casting doubts about the role of a lender of last resort in the Eurozone. It is rather the rise of populist parties, playing with the idea of countries leaving the Eurozone or the EU. While the Dutch elections showed that leaving the Eurozone is not attractive to most voters, the threat of populists and voices calling for easy solutions to complex problems is here to stay. New governments will have to address these voices and concerns. If they fail to do so, the genie of an end of the Eurozone has once again left the bottle and the question is whether anyone can get it back in.

As the European Commission’s White Paper was rather silent on possible implications for the monetary union (or it simply did not want to interfere with the proposals of the five presidents), we have taken a look at different scenarios for the Eurozone. These scenarios have more dimensions than more or less integration but also touch upon monetary and fiscal policies.

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