This was once considered a question so unlikely that is was often brushed aside - of course the Eurozone will survive, how would it break up? But although there is still no mechanism for a member to leave the Eurozone, now that Italy has been dragged into the fray it seems like we are getting to a crunch point for the currency bloc.
The problem for Europe is that there is no mechanism to "fix" the Eurozone. The US has the Federal Reserve to prop things up when something goes wrong. Likewise, the UK has the Bank of England to pump the economy with money if growth starts to wobble. But what about the Eurozone?
When Italy's debt surged above 7% this week the silence from EU and ECB officials was deafening. Markets like certainty and they like the idea of a financial back-stop or rainy day fund for when things go pear-shaped. The Eurozone has no centralised rainy-day fund, instead as pressures in Greece, Ireland and now Italy have started to mount the EU authorities have instead put together piecemeal solutions either bailouts, emergency summits or hastily arranged austerity budgets.
The market is saying enough is enough; it smells blood and unless there are some big changes in Europe then Italy and maybe Spain, possibly even France, could be next in the firing line.
But, even when the third largest economy in the currency bloc is in such financial distress, will Europe's various branches of authority pull together to save the Eurozone? Europe's high command seems bewildered by how to deal with the crisis. Greece and Italy are essentially leaderless and face general elections next year. So that leaves the European Central Bank.
The ECB is probably the only entity with the financial firepower to stem this crisis. So far it has intervened modestly in the bond markets to try and quell the rise in Italian bond yields. Its total purchase of Eurozone government debt is only about EUR110 billion since August, to put that in some context, the Fed's latest stimulus programme in the US - Operation Twist - is $600 billion. It has also insisted that these debt purchases be sterilised - i.e., it buys bonds from financial institutions who then deposit the proceeds with the Bank to stop inflation pressures from rising.
The ECB sees its main job is to preserve price stability, and it has done that remarkably well over the last decade, however, now is the time for the ECB's role to expand to protect financial stability. The market is unlikely to ease up on Italy unless the ECB embarks on outright quantitative easing (QE) and buys bonds without requiring banks and financial institutions to deposit the proceeds of the sales. This would give the ECB room to buy much more debt; some commentators have estimated that to really make a dent in Italian yields EUR700 billion worth of Italian bonds need to be purchased.
Currently the ECB seems unwilling to do this, and the Eurozone's rescue fund - the EFSF - is still only EUR440 billion in size. If nothing more is done then by the middle of November we could see a banking crisis and credit freeze in Europe that would threaten global growth. So unless it grabs the initiative now, the ECB may be forced to act in the near future.
The corporate sector isn't taking any chances. Already one travel agent is planning for Greece's exit from the Eurozone. Tui, a German company, has drawn up post-euro contracts for Greek hoteliers that spells out how they will honour their financial obligations if Greece decides to leave the Eurozone.
If Greece was to abandon the euro then it would probably return to the drachma, which would undoubtedly decline in value. Since Greece is a popular holiday destination for Europeans, Tui wants to protect itself against currency losses. And Tui may be just the beginning. Middle Eastern companies also need to consider the break-up of the Eurozone as a real possibility these days. If the ECB doesn't step up to the plate then companies will need to come up with a plan to protect profits in drachma, lira and Spanish peseta.
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