Five Reasons Why the Eurozone Will Not be Allowed to Fail

Merkel will heed Sarkozy's Pleas to Save the Eurozone

This is an important week for the Eurozone, with a summit on Friday of 27 EU leaders in Brussels seeking solutions to the Eurozone crisis.  So far, the major sticking point of the most popular solution, pooling the strong and the weak countries resources into eurobonds, has been resisted by the countries with stronger finances, led by Germany.

If a solution is not found this week, many predict that borrowing costs will quickly continue their march upward and lead to debt defaults and Eurozone exits for several countries.  The fear is of course, contagion and a likely depression for Europe and deep recessions for everyone else.

However, it is clear to me that the Eurozone will not be allowed to fail this week or any other week in the near future, for the following five reasons:

1. President Obama’s reelection bid.  The U.S. President knows that an implosion of the Eurozone will most likely bring on another recession in the United States.  Another recession means he will be out of a job come November.  Therefore, he will continue to pressure the Fed to ease and to press on with their actions last week of “making more dollars” available at cheaper rates to the European central banks. The Fed, in effect, has agreed to supply as many dollars as its European peers request.  While this ties the U.S.’ fate (and risk) more tightly to Europe (and will ultimately devalue the dollar), the calculation is simple: better to do whatever is needed to shore up the Eurozone than lose the election.
2. China.  Despite the standoffish Chinese approach to the Eurozone crisis, the Chinese know they have a lot to lose if Europe goes into multiple debt defaults and possibly a depression. Chinese sovereign wealth funds invested in Europe will take a drubbing for one.  China’s export growth to the EU slowed to 7.5% in October from a year earlier and sales to Italy collapsed by 18% from a year earlier. If Europe melts down and also depresses demand in the US, millions in China’s exporting industries will thrown out of work, despite their frantic efforts to stimulate domestic growth.  The Chinese will thus do almost anything to shore up the Eurozone, although they may wait until the last moment.
3. Oil Exporting Countries.  Many of the oil exporting countries of the middle east have massive sovereign wealth funds that are deeply invested in Europe.  They would all get a haircut if the Eurozone unravels.  Therefore, the Gulf States will their utmost to ensure the safety of their sovereign wealth funds and ensure they still have major customers to sell oil to.
4. BRICs.  The BRICs – newly powerful emerging economies of Brazil, Russia, India and China, among others are likewise set to lose a lot if the Eurozone fails.  India, for example, will lose a significant amount of outsourced business, Brazil will lose a major export market, as will Russia (oil exports), and China has already been discussed.  They will all be players in the global effort to save the Eurozone.
5. Merkel.  German Chancellor, Angela Merkel has so far been the stumbling block preventing Germany from pooling its resources via eurobonds, to protect the weaker economies.  Understandably so, since all countries would be liable for Eurobond debt – both the responsible (Germany, Finland etc.) and the irresponsible (Greece, Italy, Ireland etc) She will however, ultimately be reminded of the words of Frederick Reynolds from the English play Life in 1801, “If we don’t hang together, by Heavens we shall hang separately“. Merkel will blink in this game of chicken, even if it takes staring right into the abyss to do so.

Yes, it is certainly risky to make this assertion, but too many parties have too much to lose if the Eurozone fails.  Irresponsible countries like Greece and Italy will be punished with austerity and lose some central bank independence via tighter fiscal union to be sure, but the stronger countries will have to grit their teeth and sacrifice for the common good.. or they “hang separately”.  Self preservation will the order of the day.

These are the five reasons why the Eurozone will NOT be allowed to fail.  Go ahead and comment below…