The Euro in Crisis: Are the Euro and Eurozone in Peril?

Jeremy Levin INTL504 Analytics I American Military University

Introduction The Eurozone's foundation and advent of the Euro in the late 1990s as a singular currency for Europe was intended to ensure stability, growth, and economic partnership throughout Europe. For the first decade, the Euro appeared to be fulfilling its intended role; however, in the face of the current global economic crisis, cracks are appearing in its faade. When Greece's current prime minister took office in 2009, he revealed the Greece's dire economic straits, previously disguised through creative accounting techniques and bookkeeping, that forced the Eurozone to authorize a bailout that ran into the billions of Euro. Many economists feared that Greece would leave the Eurozone, either "voluntarily" through pressure from the other Eurozone members, or even directly expelled for non-compliance with Eurozone regulations. This did not happen. Europe's leaders determined that Greece's departure from the Eurozone would cause irreparable damage to the union as a whole. However, in doing so leaders of core Eurozone members countered popular sentiment in their home nations, gambling that the bailout would succeed and assuage public outrage at violating the Eurozone's "no bailout" clause. Fear remains, however, as additional Eurozone members approach each one's own economic crises. Portugal, Italy, Ireland, Greece, and Spain, often referred to as the Eurozone PIIGS, are attempting to enact fiscal austerity measures and revamp their domestic practices while fighting popular anger over decreased economic comfort and perceived government irresponsibility. Many Eurozone member nations have movements which blame the Euro itself for Europe's dire straits, and advocate abandoning the Euro in favor of their previous national

currencies. Core Eurozone leaders have discounted this possibility, asserting that the Euro remains a strong, viable, and stabilizing factor for Europe, but if Europe's crisis deepens these calls will likely gain strength, both from core member populations opposed to bailing out irresponsible nations, and from the nations in trouble as the populations seek both a scapegoat and a swift solution to their troubles. The Euro, used as the sole currency of 16 European nations, has become vital to the European economy and the Eurozone's existence, and as the second most widely used reserve currency and the standard to which 23 national currencies are pegged, would have global repercussions should it be abandoned. With this in mind, this paper will discuss the future of the Euro as a viable world currency. Specifically, this paper will attempt to answer the question, "will the current European economic situation result in the Euro and/or Eurozone dissolving in favor of a return to national currencies and state fiscal responsibility in the next five years?" Literature Review There is a large amount of literature on the future of the Euro and the Eurozone, especially given the current global economic climate. This literature appears largely speculative and based on the perceptions of individual experts, and quite a bit of it appears either inflammatory or sensationalist. In order to answer the specific research question, one must "separate the wheat from the chaff" in this literature, and focus on those texts based on logical, rational opinion and analyses. The EU Times detailed many of the European Union's fears regarding the future of the Eurozone, and related these fears to investor abandonment of the Euro. The EU Times asserts that the disparity between common monetary policy in the Eurozone and national responsibility for fiscal decisions has increasingly made the Eurozone vulnerable to economic instability. This

article details the effect of Greece's bailout requirement on its Eurozone partners, and their reticence to enact this bailout on an economic level--in which Standard & Poor lowered its ratings not only of Greece, but of Portugal and Spain--and on a political level, asserting that the economic crisis increases nationalist sentiment among Eurozone members, decreasing each one's willingness to assist others. (EU Times 2010) In February 2010, Reuters European Economics Correspondent Brian Love wrote that while smaller Eurozone nations are unlikely to attempt to leave the Eurozone in the immediate future, one or more may decide to do so this decade if Eurozone membership becomes too costly, especially as Eurozone policy refocuses to ensure the stability of its core members rather than the growth of its peripheral members. However, Love specifically states that exiting the Eurozone would be difficult and painful on both a practical and political level, and therefore would be considered a last resort rather than an attractive option. (Love 2010) Wolfganf Muenchau and Susanne Mundschenk wrote a comprehensive, authoritative article on the potential for a Eurozone breakup or abandonment of the Euro, detailing the legal and political aspects of such and identifying numerous scenarios in which this could become a viable option. They state that a voluntary exit of a country in danger of economic default from the Eurozone is very unlikely; more likely would be a complete breakup of the Eurozone as one or more members suffer economic default. (Mnchau and Mundschenk 2009) Pan Pylas, writing for the Associated Press, identified a number of arguments used by Eurozone member populations in considering an exit from the Euro. While slightly sensationalist, this article effectively identifies popular sentiment, which often drives political action. Pylas details sentiment from Eurozone members in trouble, such as Greece and Italy, which have significant movements to abandon the Euro in favor of their previous national

currencies over a nostalgic belief that the common citizen was previously better off. Pylas also details German premier Angela Merkel's March statement that the Eurozone needs a mechanism to expel Eurozone members who consistently violate Eurozone rules and principles. While Pylas tempers these statements by addressing the difficulty in enacting these, both practically and politically, the sentiment from both within and external to Eurozone member nations in economic trouble is useful in predicting future intent. (Pylas 2010) Business News for Europe questioned the future of the Eurozone in the face of Greece's economic crisis, and provided comments from a number of economic experts on the subject. Opinions varied between confidence in the Eurozone's ability to survive the current crisis to the belief that the Euro system is not sustainable in its present form. Each expert cited different historic or present facts and beliefs to support his opinion, each of which appears valid and important to take into account when trying to determine the future of the Euro and Eurozone. (Business News for Europe 2010) The Wall Street Journal's deputy Editor in Chief, Gerard Baker, wrote that, rather than smaller or peripheral Eurozone members leaving, and subsequently strengthening the Eurozone for its core members, Germany could viably leave the Eurozone for a scenario in which both would benefit. Baker asserts that Germany's superior economy would sustain it post-Eurozone, and the devalued Euro after a German departure would make the national debts of the Eurozone's peripheral members easier to fulfill, helping stabilize the remaining Eurozone. Baker acknowledges that a number of other core Eurozone members may choose to follow Germany, especially those whose economies are closely tied to Germany's, but argues that this is more politically viable than the alternative: a centralized Eurozone fiscal and budgetary authority with the power to control national budgets and impose sanctions for non-cooperation. (Baker 2010)

Edward Helmore, writing for The First Post, described German sentiment toward the Euro. While scant on financial details, Helmore's article raises significant German concerns regarding the apparent expectation that Germany will become the primary underwriter for junk loans throughout Europe. Helmore states that Germans were previously reluctant to give up the Deutsche Mark, and may not be willing to be bound to the Euro if it comes to a "too big to fail" scenario in guaranteeing the debts of peripheral Eurozone members. (Helmore 2010) Czech Republic President Vaclav Klaus asserts that the Eurozone has failed to deliver its promised benefits, and that the problems apparent today in the Eurozone are longtime hidden problems not caused by the current economic crisis. Klaus details the problems he views as inherent to the Euro and the Eurozone, including both poor economic prospects and decreasing democracy, and quoted the late governor of the Polish Central Bank, Slawomir Skrzypek, on the benefit to periphery-nations the ability to profit from fiscal flexibility in comparison to the Euro. (Klaus 2010) Shawn Tully, senior editor at large for CNN "Money," identified the causes of Greece's economic problems primarily as increased debt-to-GDP, increased state spending, and decreased comparative competitiveness. Tully further details how these causes are duplicated by Spain, Portugal, Italy, and Ireland, and asserts that these problems have not yet disappeared; in fact, they will likely cause further crises in the future. (Tully 2010) Theoretical Framework A number of analysts have used scenario analysis to explore the possibility of a Eurozone breakup or abandonment of the Euro as a unified currency, almost certainly due to the complexity of the issue and the interrelatedness of the actors and issues. However, scenario analysis depends on events and choices occurring as predicted by the analyst, and the same

complexity that prompted the choice to use scenario analysis also precludes effective use of scenario analysis as a predictive tool. Additionally, scenario analysis is subject to analyst bias and assumption, decreasing its utility as a predictive technique. Despite existing analyst predictions regarding the Euro's future, a systematic approach to address the issue remains of value, and may suggest indicators and warning signs of a potential abandonment of the Euro. This becomes especially relevant as national and international leadership rhetoric is an unreliable indicator, as political investment in the Euro prompts positive propaganda despite underlying instability. Additionally, a systematic, structured analytic approach to the question at hand will account for multiple courses of action that could be undertaken by the actors involved, rather than the limited applicability of existing scenario-based analysis. To explore this issue requires two subsets to the specific question: first, will one or more nations abandon the Euro and/or leave the Eurozone, and following this, if one or more nations abandon the Euro or Eurozone, will the Euro or Eurozone collapse altogether? To answer the former, the bulk of expert opinions on European economics and the prospect of abandoning the Euro identify two key facts to the issue: the intent for a nation to abandon the Euro and/or exit the Eurozone, and the ability to enact a nation's abandonment of the Euro or exit the Eurozone. The actors involved in this can be grouped into two categories: core Eurozone members, specifically France and Germany, and peripheral Eurozone members, specifically PIIGS. The latter must be addressed as a subsequent course of action dependent on the former's variables. Hypothesis

Hypothesis 1: The intent and the ability will be present for one or more nations to abandon the Euro and/or the Eurozone, prompting the collapse of the Euro and/or Eurozone by 2015. Hypothesis 2: The intent and the ability will be present for one or more nations to abandon the Euro and/or the Eurozone, but will not prompt the collapse of the Euro and/or Eurozone by 2015. Hypothesis 3: The intent and the ability will be not present for one or more nations to abandon the Euro and/or the Eurozone by 2015. Research Design This study will be accomplished in the discussion using the Lockwood Analytical Method for Prediction (LAMP). Discussion The issue for which we are trying to predict the most likely future. The issue for which we will try to predict the most likely future is the potential for the current European economic situation to result in the Euro and/or Eurozone dissolving in favor of a return to national currencies and state fiscal responsibility in the next five years. Actors involved. The actors for this issue are as follows: y y y Eurozone core members, specifically Germany and France Eurozone peripheral members, especially PIIGS Eurozone leadership and the European Central Bank, responsible for Eurozone monetary policy Study of how each actor perceives the issue in question.

Eurozone core members: Germany, which generally opposed adopting the Euro in the first place, is becoming the primary underwriter for loans and debt guarantees for the Eurozone's weak, peripheral members, and many Germans will oppose entering a situation in which Germany is perceived to be the Eurozone's only support. Also, as additional bailouts are eyed, especially the possibility of Spain, Europe's fourth largest economy, may require a Greece-style bailout, the German public will likely demand that either the next default nation be expelled from the Eurozone--for which there is currently no legal mechanism--or that Germany voluntarily leave the Eurozone. (Helmore 2010) Finally, Germany has seen a reversal of a number of its key demands from the Euro's onset, such as enforcement of conservative fiscal policy throughout the Eurozone, the "nobailout" clause Germany inserted into the Maastricht Treaty, and the distinct separation between European politics and Eurozone finance. As Eurozone policy increasingly diverges from the original Eurozone concept, Germany will probably be decreasingly willing to continue as a Eurozone member. (Baker 2010) As of June 2009, however, France favored relaxing Eurozone restrictions on its weaker members, including raising the 3% deficit cap. In June 2010 French Finance Minister Christine Lagarde reiterated her support to the Euro and Eurozone, and countered speculation on the Euro's potential demise by stating the Euro is a "public good" that is worth keeping. (BBC 2010) In fact, one of the only hints that France is willing to leave the Euro was when French president Nicolas Sarkozy threatened such unless Germany dropped its opposition to the Greek bailout, (Traynor and Tremlett 2010) suggesting France will continue its focus on Eurozone support weaker members. Eurozone peripheral members:

Of course, Eurozone peripheral members would prefer not to leave the Eurozone or abandon the Euro as a currency, and periphery leaders maintain they will not abandon the Euro, nor quit the Eurozone. Of the Eurozone peripheral members, four are the most likely to reach crises of such proportion as to make their departure from the Eurozone a viable possibility: Portugal, Italy, Greece, and Spain. However, public rhetoric from all four discount abandoning the Euro. In January, Greek Finance Minister Georges Papaconstantinou categorically excluded the idea of Greece's abandoning the Euro or departing the Eurozone. Portuguese Finance Minister Fernando Teixeira dos Santos said much the same in February, despite his admission that Portugal was experiencing an unprecedented financial crisis. Although Italian Prime Minister Silvio Berlusconi stated in June 2005 that it would be impossible for Italy to leave the Euro, (RTE Business 2005) he swiftly followed this in July 2005 with scathing criticism, blaming the Euro for Italy's economic problems. (Kollewe 2005) Of greatest concern, in February Spanish Economy Minister Elena Salgado denied even that Spain was experiencing an economic crisis, suggesting Madrid is doing little to get address its economic situation. (Fidler 2010) The circumstances of these peripheral members are dire, and one or more peripheral nations may have little choice but to exit the Eurozone, either voluntarily or under pressure from Eurozone core members. So, for the purposes of this paper, Eurozone peripheral member intent will equate to the perception that their options are so limited as to make a departure from the Euro and/or Eurozone the most rational choice. Most likely, that choice will be made in light of each nation's economic prospects. Portugal, Italy, and Greece are all in similar situations; near uncontrollable government spending, crippling national debt, with depressed competitiveness compared to other European

nations. Similarly, the prospects for all three roughly correlate. Portugal, Italy, and Greece each have public spending that accounts for approximately 50% of national income, up as much as 12% compared to 1998. The three also have seen debt-to-GDP ratios significantly rise in the same period; Portugal national debt is currently 79% of its GDP, Italy's is 119%, and Greece's debt is 133% of its GDP. Since 1989, competitiveness ratings, as measured by the Real Effective Exchange Rate, fell up to 16%. (Tully 2010) This essentially means that while national expenditures have significantly increased, each nation's ability to earn money through taxes and exports has decreased. Spain, the Eurozone's fourth largest economy, has similar problems and more. Government debt is expected to reach 78% of GDP by 2013, compared to under 40% prior to 2007, and Madrid's budget shortfall currently exceeds 11% of GDP. Spain also fell prey to toxic mortgages through easy credit practices leading to a construction boom that has already led to at least one bailout of almost a billion dollars, and billions more will probably be imminently required; a significant amount, given that Spain's 2009 GDP was approximately 1/10th of the US's. Spain's employment situation is also abysmal: Madrid pays its workers too much, so can't export enough to generate offsetting revenue, while at the same time has unemployment currently over 20%, and has to disburse welfare benefits that comprise approximately half of the government's budget deficit. (Stevenson 2010) At the same time, each of the four's ability to address their respective crises is minimal. What each could have, and probably would have done previously, under their national currencies, was devaluation to both bring the cost of their exports in line with competing nations and to reduce the real cost of their national debt in their national currencies. This would have given them breathing room in which to deregulate their economies and improved productivity,

which could have seen then through their respective crises without collapsing their economies. (Tully 2010) However, this is not an option under the Euro. So, to address their crises, each of these nations will have to enact draconian austerity measures, which will incense their respective populations, and tap into bailout money while the European Central Bank revises its policy to protect core Eurozone members rather than promote growth in its peripheral members. The combination of deepening crisis and marginal ability with which to address it could provide the impetus for any one, or more than one of these nations to leave the Euro. Eurozone leadership and the European Central Bank, responsible for Eurozone monetary policy: Eurozone leadership, and especially European Central Bank leadership, is heavily invested in the Euro's success as a world currency; the Euro's viability as a currency is perceived as directly correlating to the Eurozone's, and by extension the European Union's long-term survivability. Recent movement to centralize fiscal responsibility and authority under the Eurozone and European Central Bank, taking it away from European nations, suggests leaders will attempt to maintain the Euro at almost any cost, including sacrificing European nations' authority and fiscal autonomy. This could translate to attempts to force Eurozone members to remain within the Eurozone and on the Euro, using economic threats and coercion up to and including the threat of economic sanctions, despite a member's intention to depart. Legal and Economic Factors The Eurozone currently has no legal procedure to expel another Eurozone member, and there is no legal precedent on a member's voluntary withdrawal from the Eurozone. In fact, European treaties were established with the idea of a converging European Union and Eurozone using the Euro as its sole currency, and did not establish a divergence mechanism because the European leaders at the time couldn't conceive of ever needing it. Therefore, under current treaty

architecture, the only conceivable legal basis for expulsion would be the 1969 Vienna Convention on the Law of Treaties, which in theory provides for a country's forced withdrawal if that country was in serious breach of valid international treaty rules. Practically, however, Eurozone core members could conceivably isolate and pressure individual members to the point where the target member would voluntarily exit the Eurozone, which is also not specifically addressed in Eurozone , but would likely be marginally easier. However, a voluntary departure from the Eurozone would probably entail a departure from the EU in total, using a theoretical departure from the Common Agricultural Policy (CAP) as an example and following the Lisbon Treaty protocols for a voluntary exit from the EU. Separate from the legal aspect, there are practical aspects of leaving the Eurozone or abandoning the Euro that a member nation would have to consider. Investor confidence in the departing member would plummet, and direct and indirect investment in the country--vital to its economic revival--would contract, leading to increased unemployment and decreased government revenues. Many international actors would scramble to withdraw funds from the target nation prior to its return to a national currency. The national currency to which the nation returns would be severely depreciated, but its national debt would remain in Euros, increasing the real cost of repaying its national debt. Additionally, the departing member would have to reconvert back from the Euro to its national currency, which is a difficult and expensive process that would counter government efforts to reduce government spending. Possible Courses of Action for Each Actor Since the problem at hand has two components, it will have to be addressed with two separate sets of courses of action: primarily, departure from the Euro/Eurozone, and subsequently, Euro/Eurozone cohesion and continuation.

Primary Courses of Action: y Eurozone Core Members: o Remain in Eurozone/Euro o Choose to depart Eurozone/Euro o Attempt to expel/pressure into departing peripheral member(s) in or near economic collapse y Eurozone Peripheral Members: o Remain in Eurozone/Euro o One or more members choose to depart Eurozone/Euro Secondary Courses of Action: (assuming one or more nations have chosen to depart Euro/Eurozone) y Eurozone and European Central Bank Leaders: o Force member nation(s) to remain in Eurozone and on Euro o Allow member nation(s) to depart Eurozone and/or Euro Tertiary Courses of Action: (assuming one or more nations have departed Euro/Eurozone) y Remaining Eurozone nations/nations using the Euro continue membership and use of the Euro with a smaller membership base y Remaining Eurozone nations/nations using the Euro abandon membership and/or use of the Euro Major Scenarios within which to Compare Alternate Futures 1. One peripheral Eurozone nation approaches or reaches the point at which departure/expulsion from the Euro or Eurozone is a viable option.

2. Within a short time frame, more than one peripheral Eurozone nation approaches or reaches the point at which departure/expulsion from the Euro or Eurozone is a viable option. The possibility that no Eurozone member nation will approach a tipping point at which departure/expulsion from the Euro or Eurozone is a viable option is valid and possible, but not likely, and automatically precludes each course of action that could result in abandonment of the Euro/Eurozone. Therefore, this potential scenario will not be explored in relation to potential courses of action. Total Permutations of Possible "Alternate Futures" There are three possible courses of action for the Eurozone core members and two possible courses of action for peripheral members, for a total of six primary alternate futures. Of these primary alternate futures, four are subject to two secondary courses of action for Eurozone leadership, for eight secondary alternate futures. Four of these secondary alternate futures would then be subject to the two tertiary courses of action; however secondary alternate futures #7 and #8 effectively duplicate futures #1 and #2, and will be excluded from the tertiary alternate futures, resulting in 6 tertiary alternate futures. These futures are: Primary alternate futures: 1. Eurozone core and peripheral members remain in the Eurozone 2. Eurozone core members remain in the Eurozone; one or more peripheral members choose to depart the Eurozone 3. Eurozone core members choose to leave the Eurozone; peripheral members choose remain in the Eurozone

4. Eurozone core members choose to leave the Eurozone; peripheral members choose leave the Eurozone 5. Eurozone core members attempt expel/pressure peripheral members to leave the Eurozone; Eurozone peripheral members remain in Eurozone 6. Eurozone core members attempt expel/pressure peripheral members to leave the Eurozone; Eurozone peripheral members choose to depart Eurozone Secondary alternate futures: 1. Eurozone core members remain in the Eurozone; one or more peripheral members choose to depart the Eurozone; Eurozone leadership forces member(s) to remain in Eurozone 2. Eurozone core members remain in the Eurozone; one or more peripheral members choose to depart the Eurozone; Eurozone leadership allows member(s) to leave Eurozone 3. Eurozone core members choose to leave the Eurozone; peripheral members choose to remain in the Eurozone; Eurozone leadership forces member(s) to remain in Eurozone 4. Eurozone core members choose to leave the Eurozone; peripheral members choose to remain in the Eurozone; Eurozone leadership allows member(s) to leave Eurozone 5. Eurozone core members choose to leave the Eurozone; peripheral members choose to leave the Eurozone; Eurozone leadership forces member(s) to remain in Eurozone 6. Eurozone core members choose to leave the Eurozone; peripheral members choose to leave the Eurozone; Eurozone leadership allows member(s) to leave Eurozone 7. Eurozone core members attempt expel/pressure peripheral members to leave the Eurozone; Eurozone peripheral members choose to depart Eurozone; Eurozone leadership forces member(s) to remain in Eurozone

8. Eurozone core members attempt expel/pressure peripheral members to leave the Eurozone; Eurozone peripheral members choose to depart Eurozone; Eurozone leadership allow member(s) to leave Eurozone Tertiary alternate futures: 1. Eurozone core members remain in the Eurozone; one or more peripheral members depart the Eurozone; remaining Eurozone nations/nations using the Euro continue membership and use of the Euro with a smaller membership base 2. Eurozone core members remain in the Eurozone; one or more peripheral members depart the Eurozone; remaining Eurozone nations/nations using the Euro abandon membership and/or use of the Euro 3. Eurozone core members leave the Eurozone; peripheral members remain in the Eurozone; remaining Eurozone nations/nations using the Euro continue membership and use of the Euro with a smaller membership base 4. Eurozone core members leave the Eurozone; peripheral members remain in the Eurozone; remaining Eurozone nations/nations using the Euro abandon membership and/or use of the Euro 5. Eurozone core members leave the Eurozone; peripheral members leave the Eurozone; remaining Eurozone nations/nations using the Euro continue membership and use of the Euro with a smaller membership base 6. Eurozone core members leave the Eurozone; peripheral members leave the Eurozone; remaining Eurozone nations/nations using the Euro abandon membership and/or use of the Euro

Pairwise Comparison and Ranking of Alternate Futures for Each Scenario, Descending from Most to Least Likely One peripheral Eurozone nation approaches or reaches the point at which departure/expulsion from the Euro or Eurozone is a viable option. Primary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 1&6 2&3 2&4 2&5 2&6 3&4 3&5 3&6 4&5 4&6 5&6 More Likely Future 1 1 1 1 1 2 2 2 6 3 5 6 5 6 6

Pairwise comparison of the primary courses of action under this scenario suggests that core and peripheral Eurozone members will choose to remain members given economic crises. However, next most likely is the potential for core Eurozone members to successfully expel or otherwise force the departure of a peripheral member, so long as only one member nation approaches or reaches the point where departure/expulsion becomes a viable option. Also possible, but less likely, is the potential for a peripheral Eurozone member to voluntarily depart while core members remain in the Eurozone, the potential for an unsuccessful expulsion of peripheral members from the Eurozone, and the potential for a core member to leave the

Eurozone while peripheral members remain. Least likely is the possibility of both core and peripheral Eurozone members concurrently choosing to depart the Euro/Eurozone. Secondary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 1&6 1&7 1&8 2&3 2&4 2&5 2&6 2&7 2&8 3&4 3&5 3&6 3&7 3&8 4&5 4&6 4&7 4&8 5&6 5&7 5&8 6&7 6&8 7&8 More Likely Future 2 3 1 1 1 1 8 2 2 2 2 2 2 3 3 3 7 8 4 4 7 8 6 7 8 7 8 8

Given the near similarity of the second and eighth secondary courses of action, comparison under this scenario overwhelmingly suggest that should a single Eurozone peripheral member desire or be forced to leave the Eurozone, Eurozone leadership would not attempt to force that member to remain in the Eurozone. Less likely is that Eurozone leadership would

force either a core or peripheral member to remain part of the Eurozone over its desire to depart, that a core member would voluntarily depart the Eurozone over a single peripheral member's crisis, or that both core and peripheral members would choose to leave the Eurozone. Least likely would be Eurozone leadership attempting to force both core and peripheral members to remain in the Eurozone should both attempt to depart. Tertiary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 1&6 2&3 2&4 2&5 2&6 3&4 3&5 3&6 4&5 4&6 5&6 More Likely Future 1 1 1 1 1 3 4 2 6 3 3 3 4 6 6

In the event of a single peripheral member approaching or reaching a departureproducing crisis, the Eurozone and Euro will probably survive, although a peripheral (more likely) or core member (less likely) would probably depart the Eurozone. Less likely than either of these tertiary futures would be a mutual dissolution of the Eurozone, a breakup of the Eurozone should only a core member depart, and an abandonment of the Euro/Eurozone should a peripheral member depart. Least likely is the potential for the Euro/Eurozone to continue should both core and peripheral members depart the organization.

Within a short time frame, more than one peripheral Eurozone nation approaches or reaches the point at which departure/expulsion from the Euro or Eurozone is a viable option. Primary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 1&6 2&3 2&4 2&5 2&6 3&4 3&5 3&6 4&5 4&6 5&6 More Likely Future 1 3 1 1 1 3 2 2 6 3 3 3 5 6 6

Pairwise comparison of the primary courses of action under this scenario suggests that, given multiple peripheral members reaching this level of crisis, the potential for either a core Eurozone member to voluntarily depart the Euro/Eurozone or for multiple peripheral members to depart the Euro/Eurozone is equally likely, although peripheral members' departure would likely require core member impetus. Slightly less likely is that all core and peripheral Eurozone members will still choose to remain members given economic crises. Least likely would be both core and peripheral members choosing to leave the Euro/Eurozone. Secondary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 More Likely Future 1 1 4 1

1&6 1&7 1&8 2&3 2&4 2&5 2&6 2&7 2&8 3&4 3&5 3&6 3&7 3&8 4&5 4&6 4&7 4&8 5&6 5&7 5&8 6&7 6&8 7&8

6 1 8 2 4 2 6 2 8 4 3 6 3 8 4 4 4 4 6 7 8 6 6 8 Comparison of alternate futures becomes significantly more complicated should multiple

peripheral Eurozone members approach or reach a crisis in which departure from the Eurozone becomes a viable option. Comparison suggests that should this scenario occur, a core Eurozone member would likely depart the Eurozone while peripheral members remain. Slightly less likely would be a voluntary departure from the Eurozone by both core and peripheral members, which Eurozone leadership would be unwilling and unable to prevent. Less likely than this would be a successful attempt to force peripheral members out of the Eurozone (secondary course of action #8), although without core member impetus (secondary course of action #1) Eurozone leadership would probably force peripheral members to remain in the Eurozone. Least likely would be

Eurozone leadership attempting to force both core and peripheral members to remain in the Eurozone should both attempt to depart. Tertiary Alternate Futures: Alternate Futures Compared 1&2 1&3 1&4 1&5 1&6 2&3 2&4 2&5 2&6 3&4 3&5 3&6 4&5 4&6 5&6 More Likely Future 1 3 4 1 6 3 2 2 6 3 3 3 4 6 6

Should multiple peripheral members approach or reach a departure-inducing crisis, the most likely alternate future would be a core member's departure from the Euro/Eurozone, but the continuation of the Euro/Eurozone among the remaining members. Slightly less likely would be a mutual dissolution of the Euro/Eurozone. Beyond this, chances are evenly split between tertiary alternate futures #1, #2, and #4 in which either core or peripheral members--but not both-depart the Euro/Eurozone. Again, least likely is the potential for the Euro/Eurozone to continue should both core and peripheral members depart the organization. Analyze Alternate Futures Overall, the most likely future is that the Euro/Eurozone will continue without any member attempting to depart: this future holds true if either no members approach a grave enough crisis to warrant a departure, and in the case of a single peripheral member approaching

or reaching a severe crisis, and is only slightly less likely in the case of multiple members approaching or reaching such a crisis. Beyond this, the Euro and Eurozone would most likely continue after a severe crisis in one or more member nations, albeit with reduced membership. There is only a remote chance that the Euro and Eurozone will be existentially threatened by one or multiple member nations' crises. However, this paper will explore three of the identified alternate futures: the most likely in the case of a single nation approaching crisis, the most likely in the case of multiple nations approaching crisis, and the most dangerous to the Euro/Eurozone. Most likely in the case of a single-nation crisis: Everyone remains a member The most likely course of action in the single-crisis scenario is that all Eurozone members, both core and peripheral, choose to remain members of the Eurozone and on the Euro. In addition to the repercussions already described for Eurozone peripheral members, core members would see tangible benefits to another bailout vice the departure of a peripheral member. The bail-out money already pledged in response to Greece's recent crisis would likely cover most of the cost of another nation's bailout. Failing this, France would probably strongly pressure other core Eurozone members to approve another bailout, as long as Germany does not bear the financial brunt of another bailout. To core Eurozone members, another bailout would probably be preferable to expelling a peripheral member--which would require a lengthy legal battle, especially since the mechanism for this is questionable at best--or attempting to pressure the member out of the Eurozone--which would also take time, and would be generate incredible negative publicity. Additionally, the blow to the Euro's strength on the world market over the Eurozone expelling, forcing out, or even allowing a member to depart the organization would likely result in approximately the same financial loss to the remaining members that a bailout would require.

Most likely in the case of a multiple-nation crisis: Germany leaves the Eurozone The most likely scenario in the case of a multiple-nation crisis would be that a Eurozone core member--almost certainly Germany--would choose to leave the Euro and Eurozone prior to the departure of the peripheral nations in danger. Germany would choose to do this for a number of reasons. First, it is most able to withdraw from the Eurozone, finance a return to a national currency, and bear the economic cost of depreciation and investor skepticism while remaining economically viable. In fact, freeing itself from financially supporting weaker Eurozone members may even improve the German economy. Also, the Euro would almost certainly depreciate in the case of Germany's exit, which would make national debts easier to cover for peripheral members in crisis, (Baker 2010) which may even help avert the culmination of these peripheral members' crises if enacted early enough. Most dangerous to the Euro/Eurozone: Complete dissolution The most dangerous scenario for the future of the Euro and Eurozone is the possibility that a core Eurozone member--almost certainly Germany--will choose to leave the Eurozone for the reasons specified above, and that additional core members--such as Austria, Belgium, the Netherlands, and Luxembourg, whose economies are all closely tied with Germany's--will follow Germany, (Baker 2010) but this will not be enough to prevent a series of crises in the remaining Eurozone members, who will then also choose to depart the Euro and Eurozone. This potentiality would almost certainly permanently fragment the Eurozone and the Euro would cease to be a viable currency. Potential to Transpose into another Alternate Future The chance for the alternate futures identified in this paper to transpose into another identified alternate future is extremely slim: most of these alternate futures are mutually

exclusive. However, if an impending crisis looms that threatens the Euro/Eurozone, the potential does exist for Eurozone nations and leadership to preemptively address the situation by dramatically altering the current treaty architecture or creating a new treaty that could significantly alter the economic events, or at least the Eurozone's ability to deal with the events. Determine Focal Events that will bring about a Given Alternate Future The most likely future is one in which the Euro and Eurozone remain intact. However, events may transpire which would increase the relative likelihood of another alternate future. Such events could include: y A rapid, unforeseen economic collapse of a Eurozone peripheral nation. This could occur if one or more nations are mimicking Greece's non-disclosure of its true economic situation, especially since the known economic situations are so dire. In this situation, a bailout would likely become far less likely, since the offending nation(s) would be perceived to have been deceptive, and therefore undeserving of assistance, and would increase the chance of a Eurozone member's departure from the organization. y A Eurozone core member, such as Germany, could determine that another bailout is not in its national interest, and refuse to support--or even allow--a Eurozone bailout of another nation, again increasing the chance of a Eurozone member's departure. y Eurozone nations and leadership could mutually agree to a managed dissolution/transition away from the Euro and Eurozone. This would almost certainly entail a return to national currencies, and would likely include the establishment of another economic organization to replace the Eurozone that would incorporate the lessons learned from the Eurozone's successes, failures, and problems.

Eurozone leadership removing fiscal authority from individual nations and centralizing this authority under itself. This would suggest that Eurozone leadership would not allow any member nation to depart the organization or the currency, no matter the circumstances.

Indicators for the Focal Events A number of events could be used as indicators for the above Focal Events, including: y Exposure of a scandal involving a Eurozone member nation cover-up of severe economic instability. y A concerted effort by Eurozone core members to establish a mechanism for the forcible expulsion of another Eurozone member. y European and/or Eurozone leadership statements supporting, or establishing feasibility studies to support the establishment of an organization to replace the Eurozone. y A motion is put forth in the Eurozone legal structure to consolidate and centralize fiscal authority under the European Central Bank.

Bibliography
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