Euro is not working, but it cannot break up - Natixis

Patrick Artus, Research Analyst at Natixis, suggests that many non-European investors now believe that the euro will break up, given the euro zone’s structural problems and the risk that populist parties that favour an exit from the euro may come to power in several countries (in France and Italy in particular). 

Key Quotes

“We believe this scenario of a break-up of the euro is incorrect, and that the correct scenario is completely different: the euro is not working, the structural problems in the way it functions are serious; but it is impossible to exit the euro: so what happens if a currency area has severe institutional problems but cannot break up?” 

“Possible scenarios if the scenario of a break-up of the euro can be ruled out?

• The first scenario is a "rosy" scenario, where the impossibility of leaving the euro leads to a correction of the structural problems mentioned above: creation of a federal euro-zone budget, restoration of the lender countries’ confidence in the solidity of the borrowing countries (reduction in fiscal deficits, restructuring of banks), switch to symmetrical adjustment processes (fiscal, current-account balances, cost competitiveness).
• The second scenario is a "gloomy" scenario, which once again is not a scenario of a breakup of the euro, but a scenario of growing heterogeneity in the euro zone: poor and rich regions will increasingly coexist, with an ever-increasing income gap. Note also that migration between euro-zone countries cannot solve this problem of growing income heterogeneity. Let us assume that many employees in a poor country migrate to a rich country: these employees’ situation would obviously improve, but the contraction in the tax base in the poor country would create a budget crisis, as the country’s public debt would remain unchanged.”