Death of Euro Exaggerated Amid Political Will

Investors betting against the euro- area surviving its debt crisis in one piece may be overlooking one thing: the will of politicians to hold it together.

German Chancellor Angela Merkel is intensifying her defense of the currency. French President Nicolas Sarkozy says there’s no alternative to channeling aid to Greece without risking the kind of cataclysm set off by the 2008 collapse of Lehman Brothers Holdings Inc. Greek Premier George Papandreou this week proposed 6.6 billion euros ($8.7 billion) of fresh austerity measures in a recession headed into a fourth year.

The euro is “a political project,” said Erik Nielsen, global chief economist at UniCredit Group in London. “The market may not have believed them, but leaders have repeatedly said they will do whatever it takes to keep it together.”

Keeping the 17-nation region together means politics will have to remain the glue, challenging the argument of investors including Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian. He says the euro area may need to shrink to survive. That concern is highlighted by the swelling gap between the 10-year interest rates of Germany and Italy.

In a sign investors are questioning the longevity of the euro, the spread between German and Italian benchmark bonds reached almost 400 basis points, having held below 50 basis points for most of the last decade. Four in 10 respondents to the quarterly Bloomberg Global Poll said last month they expect a nation to leave the euro within a year and a further 32 percent said a member would exit in two to five years.