Buying a little more time
Analysts warn policymakers to address structural issues, writesSusie Watkins Polakova
Doing whatever it takes has become something of a mantra when it comes to dealing with the euro-zone crisis.
"We want to do everything we can to save the currency," says the head of the European Central Bank.
"We want to do everything we can to keep the Greeks in," says the German Chancellor Angela Merkel.
"We want Germany to do everything - or nothing," says the international financier George Soros.
However, as Mr Spock from Star Trek was oft to say, euro supporters may find that having is not so pleasing a thing as wanting.
In the past few weeks the international financial community, politicians and bankers, have imposed a grand plan to save the euro, gone further and committed more than has ever been committed to save the currency, but most analysts are wondering if it is worth saving in its current form.
At the centre of the bailout of the ailing currency, and countries drowning under debt, is an audacious plan by the European Central Bank (ECB) president Mario Draghi to buy vast tracts of bonds.
The ECB has committed to buying what could be unlimited numbers of bonds of debt-stricken euro-zone members on the condition that these countries make a formal request for bailout funds and stick to the terms of any deal.
Draghi says the scheme will provide a "fully effective backstop" and that the euro is "irreversible".
The markets reacted favourably when the news was announced and later when the German courts ruled in favour of an earlier proposal to support ailing European economies, the European Stability Mechanism (ESM).
But firing all the big guns hasn't found favour in all quarters. The head of the Bundesbank, Jens Weidmann, says the bond programme is, "tantamount to financing governments by printing banknotes".
In its ruling on the ESM, the German constitutional court capped German contributions to the €500 billion (HK$5.087 trillion) bailout fund to just €190 billion. Still too much shout the growing numbers of ordinary Germans who, according to the latest polls, now want out of the euro bailout.
Leading analyst Paul Mortimer-Lee, global head of market economics at BNP Paribas, says the ECB, and by default Germany, have no option but to rescue the euro ... for now. "This was the lesser of two evils," he says. "It was the equivalent of getting the can down the road until after the German elections. And worry about tomorrow only when it comes."
Mortimer-Lee says the rescue plan, the biggest debt refinancing in economic history, has changed the very nature of the ECB, with Draghi staking his reputation and that of the bank on the plan.
The deal seems to have bought the crisis countries and those who need to nurse their ailing neighbours a little time, but most analysts say it may be only a few months.
The head of European foreign exchange strategy at Morgan Stanley, Ian Stannard, says: "We believe that the euro will be supported through to the end of the year, with euro/US dollar targeting the 1.34 area."
He welcomes the ECB bond programme saying: "It is likely to continue to provide support to peripheral asset markets, reducing volatility in inner-EMU bond markets, allowing investors to allocate funds to Europe once again. This is likely to support the euro.
"While this is likely to provide some stability in asset markets, European policy makers will have to address the structural reform issues, which will likely leave the euro vulnerable over the medium to longer term. After the temporary rebound we would expect it to come back under pressure and we continue to look for the euro/US dollar to target 1.15 by the end of 2013."
Any political buy-in to support the euro may be increasingly difficult to obtain, given dire forecasts for growth across the European Union. Morgan Stanley is not alone in predicting zero per cent growth across the whole of the European Monetary Union in 2013.
Michael Hewson, senior market analyst at CMC Markets UK, says there is a real prospect of a smaller boiled down common currency. He says: "I think we could see a smaller euro definitely, as it is now a credibility issue and it is clearly unworkable in its current form."
Before the euro, Germany, Austria, Holland and Finland pegged their currencies in a very tight band which allowed fairly close political convergence so these countries might be able to make it work. France is a different story given that their economy has a much larger welfare component and from a labour market perspective has much more red tape than the other core countries.
Hewson adds: "It remains inconceivable to me that the euro can survive without political buy-in from electorates across Europe. It needs democratic legitimacy which it currently does not have. If it gets that it has a chance."