The under-fire euro fell further on Wednesday, slumping to an eight-month low against the US dollar amid rumblings over the long-term future of the eurozone.
The fresh selling was prompted by a report claiming that Hans Eichel, the German finance minister, and Axel Weber, the president of the Bundesbank, were present at a meeting at which the possible break-up of European Monetary Union was discussed.
The German Bundestag is also said to have commissioned a report on the legal repercussions of a country wishing to leave the EMU.
Germany’s finance ministry labelled the talk “absurd”, while Mr Eichel and Mr Weber issued a statement saying the euro was a “unique success story”. But the damage had been done.
Of course there are pro forma denials, but it looks like the French and Dutch referendum results have allowed the German govt to raise the obvious questions about why the Bundesbank should continue to support Europe’s weaker economies. The bigger question is why Germany went along with the Euro scheme in the first place. But having done it, and finding the going perhaps harder than they anticipated, the German pols and finance bureaucrats may now be looking for a place to get off the train.
Although most currency analysts regard the break-up of the eurozone as an extremely faint prospect, they said the potentially disastrous repercussions of such an event mean it could not be totally ignored.
Tony Norfield, global head of forex strategy at ABN Amro, put the probability of a splintering of the eurozone at “5 per cent or less”.
“Our view is that EMU will not break up. That will be way down the line as the last resort because of the political capital eveyone has got invested in it,” he said.
Nevertheless Mr Norfield added that if a break-up was to occur, it would be a “disaster” for the euro.
When people start talking like this it means that the odds of the events they are trying to dismiss are now high enough to be undismissable. This doesn’t mean Euro abandonment is a certainty, only that the odds of it are increasing. Look for more such talk in Germany and elsewhere.
If the Euro falls apart it won’t happen suddenly, just as Euro introduction was planned over an extended period. Governments are usually slow and deliberate about such major policy changes. Nonetheless, EMU failure would be like a giant fish hook ripped from the guts of the European political class: painful, messy and very interesting to watch. And it just became more likely.