The great roller coaster ride which has been this recession in Europe has continued in the last few days with the spotlight turned on Ireland. At the time of writing, the Irish government has been ‘forced’ to accept a £77 billion ($123 billion) loan from the European Financial Stability Facility (EFSF) in a deal ultimately designed to save the Euro. The loan is to be coupled with further draconian budgetary and wage cuts which could lead to civil unrest in Ireland. This latest painful twist in the saga, which follows the £94.1 billion ($150 billion) Greek rescue, has provoked yet more bizarre reactions and worrying speculation.

To most commentators’ evident surprise, it has emerged that the UK exports more to Ireland than to Brazil, Russia, India and China combined. The UK therefore, which until recently had congratulated itself on not being part of the Eurozone, has found itself having to contribute approximately £7billion ($11billion) in loans to assist Ireland and, supreme irony, to support the Euro. The justifications offered by UK politicians include: helping a friend in need, protecting our closest economic partner and supporting the Eurozone because the UK might need the Eurozone’s support itself in due course.  There are now fears that Spain, Portugal or Italy will be next in need of similar supportive measures.

UK politicians have long argued that the Eurozone is unsustainable: It is not an optimal currency area with wage flexibility, geographical mobility of labour and a strong element of centralised fiscal policy. The individual currencies no longer have the ability to adjust their currencies to accommodate economic necessities. The UK’s current survival is in no small measure due to the UK’s ability to devalue the currency significantly from its peak in 2007. Questions are again being raised as to whether the 11 year old Eurozone can survive the latest storms. Whilst the obvious candidates to leave the Eurozone are the weakest economies which have consistently failed to impose tight fiscal control, wage restraint etc : Greece, Ireland, Spain, Portugal, some commentators are beginning to see Germany as the weakest link in the chain. It is Germany’s formidable current account surplus, supported by decades of iron discipline, which is effectively paying for the chronic current account deficits in the weaker economies. German voters may prove reluctant to vote for a government which is prepared to continue bailing out these ill-disciplined regimes. The conundrum is that if they do not do so, the break-up of the Eurozone would enable the weaker constituents to devalue and thereby to become more competitive against Germany which, in turn, would reduce Germany’s hard-won current account surplus. Pressed on whether the Euro will survive the latest buffeting, the UK’s Foreign Secretary, William Hague, could only respond: ‘Who knows?’

‘Who knows?’ seems to be a fair summary of where we are at in Europe. The concern is that a collapse of the Eurozone at this point would dramatically, adversely impact the world recovery.

-David Perry

David Perry is Vice President and Regional Director of the EMEA Region at NAI Global.