Will a Greece Exit Trigger Euro Parity With the Dollar?

The once taboo subject of a Greek departure from the eurozone cracked in the past couple of weeks, primarily with threats to Greece. Today the exit discussion dam broke wide open as Eurozone tells members to make contingencies for "Grexit" Euro zone officials have told members of the currency area to prepare contingency plans in case Greece decides to quit the bloc, an eventuality which Germany's central bank said would be "manageable".

SINCE Greek Prime Minister George Papandreou declared his intention to hold a referendum in his country on the recently negotiated rescue plan, the situation in Athens has been somewhat volatile.

The euro is set to sink to parity with the dollar in 2011 because of the slow pace of economic recovery in Europe, if it has not broken up by then, a consultancy predicted Friday.In a quarterly report on global economic prospects the London-based Centre for Economics and Business Research (CEBR) forecast that the European single currency would fall to parity against the US greenback next year.The CEBR predicts that the Federal Reserve Bank will start to raise US interest rates in late 2010 in response to strengthening growth.

By Tim Clayton:Divisive Euro-zone politics will increase the threat that Spain continues to drags its heels on a bailout request while acrimony between Germany and France will intensify fears of peripheral revolt which will unsettle the Euro. The least-ugly contest should be won by the dollar this week with the Federal Reserve also under pressure to signal a shift in potential exit strategies and take a slightly more optimistic economic tone.

Nicholas Crafts is director of the CAGE Research Centre and professor of economics and economic history at the University of Warwick. A full exposition of this argument can be found in the author’s CAGE-Chatham House policy briefing paper, “Saving the Eurozone: Is a ‘Real’ Marshall Plan the Answer?”.

LAST year, the euro was just about the worst-performing of the thirty-odd “major” currencies tracked by Bloomberg. That seems fitting: the sovereign-debt crisis at the euro zone’s edges was the biggest macroeconomic nasty in 2010. The wonder is that the euro did not fall harder. It lost “only” 6.6% of its value against the dollar, not a huge sell-off for a currency whose very existence seemed under threat. Even now, after an early-year rally in the dollar, the euro stands at $1.31 or so. That is comfortably above the $1.15-1.20 range that is widely considered as fair-value.

By Thomas Warner:There's been a lot of talk lately about how likely it is that Greece will soon be forced to quit the Euro. If only the Greek crisis could end so simply.A Greek exit from the euro would be an awful mess, but it would at least bring closure and a chance to move on. Greece would arguably have a better chance of recovering sooner. But best of all for the rest of us, Greece would no longer be a potential trigger for wider European or global crisis.