Two Europes: Is splitting up the EU on the table?
The European debt crisis has dominated news headlines for the last few months and there is now talk about a possible solution that involves somewhat of a breakup. We posited early that the possibility of a breakup in the EU could rise and now this forecast seems more likely. The European Union has indirectly separated itself into two via different levels of risk market participants are willing to put on the line to invest in some nations (core) versus others. We are looking at bond rates and the euro vs. the dollar to gauge sentiment but right now the idea of breaking up the EU is catching steam due to what we have identified as cultural and political economy problems that can’t be solved by throwing money at the issue.
French President Nicolas Sarkozy is now the first EU leader to publicly advocate a solution that isn’t ‘unifying‘ in regards to the EU. He spoke at a university in France and proffered the possiblity of 2 euro zones. After the recent news of resignations from Greek Prime Minister Papandreou and the Italian Prime Minister Berlusconi, investors are now seriously considering the impact of a less unified EU. Splitting up the EU wouldn’t be the end of Europe and could prove advantageous if “unbundling effects” occur where nations that are growing are not held back by regional spillovers effects from countries growing at a slower pace. This could be the beginning of a new outlook on the EU and perhaps the euro as a common currency.