Eurozone financial leaders reached agreement on an aid package for Ireland this weekend. In exchange for 85 billion euros, Dublin will have to make drastic cuts. The euro is, however, not safe yet because Portugal and Spain are also at risk. Johan Huizinga takes a pessimistic look into the future.

It is December 2010. German Chancellor Angela Merkel’s plane soars into the dawn sky after taking off from Brussels’ Zaventem airport. It’s less than an hour since European leaders ended their marathon meeting. They failed to reach agreement on a safety net for their weaker Eurozone brethren.

Ms Merkel’s plane leaves a trail of white condensation in the freezing blue. She looks at her BlackBerry and sees the Asian markets have already suffered major losses. Frankfurt has not yet opened.

A European emergency fund, bankrolled by tax payers, has to be ever-ready to bailout weak euro-countries. All the leaders agreed to this. But, Ms Merkel insisted, banks and other investors also had to accept that they could, in a crisis such as this one, lose some of the money they had loaned these countries.

No guarantees
Ms Merkel was no longer willing to let the German taxpayer cover the risks of banks lending money to weak euro-countries. “If a country can no longer pay its debts, we as a government are certainly willing to lend a hand with new loans,” said the chancellor. “But we don’t need to guarantee that the banks will get their full 100 percent back,” she added.

That was too much for her colleagues. They argued that, if you did that, no bank would be willing to lend those countries money and the eurozone would fall. Because Europe would have to use even more of its emergency fund in financial support, and tax payers in strong countries such as Germany would be even worse off. She knew that she’d have a difficult time trying to sell this argument back home. The call from German MPs to leave the single currency would become even stronger.

Interest rate hike
Ms Merkel returns to Berlin empty handed. The European markets respond immediately. The interest on loans to Ireland and Portugal spirals. The banks think that the risk the countries will default on their debts is too great. They are only willing to lend money for large returns – high interest.

Within a few days, the financial markets’ unease envelops Spain and Italy. Even France, starts to be suspect because of its enormous pensions burden. The Germans have had enough. Within a fortnight, opinion polls give a new populist political party, D-mark für Deutschland (Deutschmark for Germany), a popularity rating equivalent to 25 percent of the seats in parliament at an election.

Countries leave the euro
Germany suspends its payments to the temporary EU emergency fund. The rescue operations for Greece, Ireland and Portugal come to standstill. These countries leave the single currency reverting to the drachma, Irish pound and the escudo respectively. These currencies undergo major devaluation, making exports cheaper. But the foreign debt is valued in euros. The independent currencies have been devalued in relation to the euro and the countries’ debts end up being even greater.

No more confidence
Within a few weeks, confidence in the euro has completely disappeared. Debts can’t be paid back, banks get into trouble again and voters take to the streets in protest. The euro gets the blame and the single currency disintegrates.

Angela Merkel wakes with a start. The landing was a bit bumpy. She heaves a sigh and grabs her BlackBerry. The Frankfurt stock market has suffered major losses, but the euro still exists. Maybe she’ll have to water down some of her demands. She knows it’s all just delaying tactics. A euro that’s just kept going by politicians, without clear automatic rules, sooner or later is bound to go bang.