Why a twin track euro is the only way to save the currency

Ten years on from the introduction of the euro, opinion is divided over whether the troubled single currency can survive another decade, especially in its present form.

Barings' head of fixed income and currency Alan Wilde said the euro will still exist in a decade's time but may well look very different.

One scenario he outlined is that of a split euro, where there is disparity between the stronger and weaker eurozone players.

"Realistically I think the euro will break out from the existing euro into harder and softer currency areas," said Wilde.

"A harder currency will be driven by the Northern European countries, and whether France would survive in that is an open question. A softer currency would be driven by the weaker peripheral states."

Wilde said the harder euro would likely appreciate against almost every other currency, while the future of the softer euro would be "precarious".

"The other scenario is that countries will drop out of the euro, one by one. You could see Greece, Portugal and Ireland going back to their former currencies and then it would be difficult to see how those currencies will reach a level of where we are today because there is no formal exit strategy.

"Probably the rule of thumb is a 30% to 50% devalution in currency level. This is what the Greeks would need to restore their competitiveness," he added.According to Darwin IM's David Jane, political union is the only thing that can save the single currency, which was itself a flawed idea from the start.

The manager of the Darwin Multi Asset fund said he is unsure whether eurozone leaders will be willing to take the steps needed to ensure the survival of the single currency in its present form.

"Emotionally, politicians are committed to retaining the euro, but are they prepared to do the actions required to retain it and all parts within it? Clearly the Greeks cannot repay their debt in hard euros at par, and a number of other countries cannot either."

Jane said policymakers could debase the euro using inflation across the whole eurozone, or else they could force Germany and France, which is itself struggling under the weight of its debt, to support the weaker nations.

However, this would lead to falls in the euro and higher German government bond yields.

Ten years after the euro first came into circulation, Jane said the euro could still be here a decade on, as long as political union can be achieved.

"When the euro came in I thought it was a foolish thing to do," he said. "The euro will still be here in ten years if you can come up with a solution to the crisis, but it will require national governments becoming subsidiary to the ECB. However, we are a long way off that yet."

Prime Minister David Cameron made the right decision in vetoing the EU treaty, Jane added, although this course of action was deeply unpopular with other EU politicians.

"It was the right thing to do - there is no way the UK should compromise its business environment," Jane said, adding there should not be any serious repercussions for the UK as the move will not impact Europe as a free trade area.

Jane is long the dollar and sterling in his portfolio. He has been focusing on the US domestic story as a hedge against eurozone turmoil, as he said two markets are not showing signs of correlation.

"I am concerned the eventual solution to the euro's problems will lead to some material currency volatility, and for this reason I have been reducing exposure to exporters more generally," he added.

Late last year Schroders' head of UK equities Richard Buxton said a twin-track euro looks to be the likely outcome when Europe emerges from the debt crisis.

The manager of the £2.5bn UK Alpha Plus fund expects the eurozone crisis to reach a "crescendo" this quarter.

The final outcome could be several eurozone countries remaining in the European Union but exiting the single currency, he suggested.

"Even if the ECB and Brussels provides a lot of assistance to countries such as Italy and Spain to try to ensure fiscal union, if the price of fiscal union is giving up some sovereignty, some states will not put up with it and will leave. So the euro members would shrink to a smaller group," he said.