A recent note from Citigroup to its clients warned that the Euro area risked falling apart if the EU member states did not unite at a financial and political level. The biggest financial services company in the world informed its investors that the threats to the single currency will persist even after the crisis in Greece. According to Citigroup, the Euro area does not stand a chance of survival if the member States do not unite in respect to the economic and political measures. “The EU must take a stand and decide whether it wants to become “the United States of Europe” or a patched blanket of independent countries”, shows a note sent by the chief-analyst of Citigroup, Tom Fitzpatrick, quoted by Bloomberg.
As negotiators are discussing a three year loan to Greece that could amount to as much as €120 billion in total - after euro area states and IMF agreeing earlier his month to provide up to €45 billion- the question arises about a risk of contagion to other countries. Portugal is seen as the country most likely to follow Greece; Ireland too is seen as vulnerable after its government published the euro area's largest budgetary deficit in 2009, at over 14 per cent of GDP; Spain became the latest euro area economy to suffer a credit rating downgrading. As contagion from the Greek debt crisis appeared to be spreading rapidly, markets have reacted strongly causing a rise in bond yields and a tumble in stock markets.
Current talks are designed to create an 'ad hoc' support mechanism for Greece, despite difficulties in the other euro area countries. However, the European Commission will come forward with proposals in May, intended to set up a crisis resolution mechanism.in which tighter rules for fiscal discipline will be built inorder to prevent moral hazard.
The German debate is revealing about the lack of cohesion in Europe. Opponents to rescue Greece ask on the basis of legal arguments - the no bail out clause in EU Treaty- for Greece to exit temporarily the euro area . As W. Munchau pointed out (FT 25 April),' the argument is full of legal hypocrisy'. Greece cannot in fact exit the euro area without leaving the European Union. So, if Germany blocks the loan package, Greece will be in a default situation and will put several German, French and Swiss banks at risk due to the size of their holdings of Greek debt.
Euro area countries must prevent a fire from spreading to the entire European economy. If your neighbor's house is burning, you have a moral obligation to help him. Cohesion should prevail over the narrow interests of the euro area countries . If Europe acts as a united block, it can defeat market fundamentalism and save the euro.