But it has been long in coming. PwC recently did a white paper on the crisis, “Breaking up is hard to do,” which gives four outcome scenarios and how to prepare for them. The paper notes that the roots of the crisis go back to 1999 with the inception of the euro, but there are two underlying problems that remain unchecked: Diverging competitive positions and current-account balances. Not surprising, it’s countries such as Germany and the Netherlands that have a higher price/cost competitiveness and stronger current account balances while the weaker countries are of course Greece, Portugal, Spain and Ireland.
The paper states four possible scenarios that could play out in 2012:
- Successive phases of monetary and fiscal action hold the Eurozone together at the cost of inflation;
- Voluntary defaults for highly-indebted sovereigns;
- Greece exits the Eurozone and a firewall is built around other economies;
- A new currency union is formed by the stronger economies.
Of these scenarios, number one appears the most moderate, projecting slow growth and higher inflation that actually could restore the relative competitiveness.
The euro crisis really is a test case for the United States, and should be watched closely by those who want to hit an iceberg with harsh austerity programs. This is history in the making, and we must be careful not to become another Titanic.