The euro continues to show some weakness against its major peers like the dollar and yen as concerns that some of the euro zone nations may dump the use of the currency build up. The European Central Bank, as we know, cannot extend its hand solely to a single country since it was tasked to monitor and regulate the financial system of the entire euro zone. The recent Greek tragedy, however, has forced the ECB to undermine its own policy as it already started buying Greek sovereign bonds to support Greece with some liquidity. This action, while providing liquidity in the short term, only acted as a precedence for the other countries. Meaning, some countries may in fact carelessly spend again thinking that the central bank will be there to bail them out in case things get worse.
Since majority of the assets of the EU-member nations are valued in euros, a weakening currency would surely devaluate their assets. The massive bailout package by the EU nations and the IMF could not restore the market’s confidence in the currency. Even the ECB’s latest move has backfired. How then could they keep the EUR’s valuation afloat? It seems like the ECB and the EU nations are running out of cards in their sleeves. If this goes on, other countries may be forced to breakup from the band in order for them to preserve the value of their assets.
If any one of its EU members breaks up from the group, the overall output of the euro zone would decrease. Remember that the output of the euro zone is just the sum of the outputs of its members. So if one takes the leads, others can follow as well. On the sentimental side, it’s quite obvious that a breakup could very much signal a declining confidence in the currency. Nobody wants to see the euro dissipates into ashes other than those who have short positions. I think that it would be better if Germany and France, the two biggest nations in the euro zone, would carry everyone else on their backs rather than they do nothing and get pulled down. Therefore, I would go out in a limb and say that countries like Germany would not allow the EUR to take some more damage as such would only negatively affect its own economy.