The City has always been sceptical about the project that has led 12 EU members to adopt a common currency but until now few have imagined that it could collapse, with EU states reverting to marks, francs, pesetas, drachmas and other former currencies.
It is a “highly political” issue, according to one economist with an investment bank who did not want his name associated with discussion of the issue.
“It is not something I see as a plausible outcome, nevertheless it is something that’s clearly affecting market sentiment and capital markets,” he said.
Economists’ imaginations have been stirred by the two “no” votes last week and by statements about the possible collapse, temporary or otherwise, of monetary union.
Many London traders doubted whether the euro would ever see the light of day and now they lend a ready ear to rumors of its impending death.
Deeming the break-up of monetary union unlikely that did not stop London foreign exchange dealers and economists from talking about it. But because the idea has a superficial attractiveness, there is a danger that it could be mooted as a real possibility in some countries.
Not only could some countries want to pull out of the eurozone by 2008, but without political union the euro’s demise is “inevitable” by 2020.
If and when the Chinese yuan breaks its link with the US dollar and Asian monetary cohesion breaks down, the US dollar will weaken.
The euro will appreciate by between 20 percent and 30 percent against the US dollar. EU countries, particularly “Italy, Greece and Portugal, which traditionally used devaluation as a safety valve,” will “be unable to cope” and will be tempted to leave the eurozone.
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