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As Trust Evaporates Euro Facing Chaos: Economist

As investors focus their attention on the latest twists in the euro zone debt crisis, analysts at ECR Research in the Netherlands are predicting conditions could descend into chaos as investors lose trust in the governments who had been expected to solve the problem.

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CNBC.com

“The problem countries cannot survive without external support mechanisms but such aid comes with strings attached. Precisely these preconditions are exacerbating the situation in the weak member states in the short term, economically as well as politically,” said Edward Markus, the chief analyst at ECR Research in a report.

With Italy rapidly “sliding down” a slippery slope, Markus is increasingly worried about France. “An adequate solution seems increasingly unlikely. Conditions could escalate into chaos in the near future.”

Broken promise after broken promise on finding a long-term solution to the crisis means statements from the G20 or euro zone summits are beginning to sound hollow, according to Markus who believes the loss of trust will itself add to the euro zone’s woes. “Solutions are impossible because of the agreements that were drawn up when the euro was introduced and as long as the economies of the weak euro countries continue to contract.”

The only solutions according to Markus are higher growth, fiscal union or allowing the ECB to buy up far more government debt.

Unfortunately the chances of any of these things happening appear unlikely.

“There is an increasing risk that the euro zone will crumble. As long as this is the case, capital will flee from the weak euro countries to stronger states and the yield spread between bonds issued by lower-rated in the euro areas and the strong countries will continue to widen,” said Markus.