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April 21st 2005

Investors consider possibility of EU breakup

According to a new report by Morgan Stanley, the EU may be in the process of dissolving. The integration effort, which was originally undertaken for political reasons, has failed to live up to expectations. Many economists make a superficial comparison between the EU and the United States, as each is a collection of semi-autonomous entities linked together by a common constitution and common currency. However, they argue, it makes sense for the United States to be linked by a common currency, as there is a high degree of economic integration and interstate trade. In contrast, the EU is a diverse collection of sovereign nations whose economies are relatively distinct from each other.

Some nations, notably France and Holland, are beginning to come to terms with this. They realize that the political union should be distinguished from the economic union. Euro area growth is sluggish at best. Unemployment is high, and aggregate demand is low. There is a complete absence of fiscal discipline, in contravention of the EU constitution, which looks like it may soon be scrapped. Many investors are beginning to price this risk into the Euro, which has failed to rally against the USD, despite a record trade deficit. Before, the big question was whether the Euro might one day rival the USD as the world’s reserve currency. Now the question is, in 5 years, will the Euro still exist?

Read More: Markets too ‘complacent’ about breakup of Euro-zone

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Posted by Adam Kritzer | in Euro | No Comments »

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