Europe's ongoing efforts to rescue the sovereign-debt-hit countries are risky of failing and no matter what scenario will happen, the euro will end up with a weaker currency, according to some U.S. experts.
"Attempts to resolve the problems in Europe are failing, and the crisis is spreading from Greece, Ireland, and Portugal to larger nations," revealed in a report released on Thursday by Perter Boone and Simon Johnson, two researchers at Washington based think tank Peterson Institute for International Economics.
Europe's financial system relies on moral hazard, i.e. a "no defaults" policy, to attract the funding needed to roll over large amounts of short-term bank and sovereign debt, said the two authors who released a new report -- Europe on the Brink.
They argued that politicians in European creditor nations are calling for private sector burden sharing, investors are demanding higher interest rates to hold these debts. "But higher rates may tip banks and nations toward bankruptcy."
Their comments came at a moment when the Eurozone leaders are gathering in Brussels to discuss an agreement at an emergency summit to resolve the Greek debt crisis.
There would be three scenarios for the future of the euro area, according to Boone, a nonresident senior fellow of the institute and Johnson, former chief economist of the International Monetary Fund.
Under the first scenario, the euro area would try to reassert its commitment to avoid defaults and inflation. But this will continue the moral hazard regime, which may cost the credibility of all parties involved.
The second scenario involves elimination of the moral hazard regime. The euro area would admit that some sovereigns have too much debt and a series of debt restructurings would follow.
The final scenario would be for policymakers to continue to contradict themselves by promising selective defaults or restructurings of some countries' debts while maintaining that they can ensure the stability of the rest of the euro area. But this may cause contagion, which in turn would result in panic.
"The evolution of politics in this scenario is hard to predict, " they said. "Ultimately, whatever occurs, the euro would turn into something more reminiscent of the Italian lira or the Spanish peseta than the strong Deusche mark its founders once envisioned."