Will Europe Become a Budget Travel Paradise?

How does the current euro crisis affect you and your travels? The politicians and bankers are all worked up, but will the euro zone’s current economic turmoil have any significant impact on visitors from North America? Certainly, the euro is under threat, and because Europe is such an important destination for visitors from North America, what happens to the currency is important. But few analysts are looking into the possible impacts on visitors—a void we’ll explore, if not completely explain, right here.

The Default Threat

The current threat is that some members of the 17-nation euro zone will be unable or unwilling to reduce national budget deficits enough to meet requirements and deadlines set by the European Central Bank, and that they will then default on huge outstanding loans and other debt obligations. Countries considered to be at greatest risk of default are Greece, Portugal, Italy, and Spain, although others face similar, if less severe, problems.

Unfortunately, “solving” the deficit problem isn’t easy. The only real solution to deficits—some combination of increased taxes and reduced expenditures—has run into stubborn popular resistance in the affected countries. Greeks have already shown their willingness to take to the streets over government austerity measures, and the same might well happen in other countries.

Will noncompliance lead to a fracture of the euro zone? The modern world has never seen such a multinational monetary union, much less one that subsequently fractured, so history provides no guidance at all. At best, we can only speculate. Here are three possible scenarios:

A Weak Solution: We Americans know quite well that when something must absolutely be done by a deadline, the most certain outcome is that politicians kick the problem down the road. That’s the likely outcome here—more rhetoric and less action. Greece and Portugal might not be quite “too big to fail,” but the other countries probably are, so one way or another, to treat the problem, the euro leaders will likely, in Carleton Greene’s words, “Dissolve it in a weak solution.”

Quit or Be Evicted: If the politicians can’t sidestep the problem, the wayward countries may have to split from the euro zone. But the political machinery makes no provision for either voluntary secession or eviction from the euro zone, so nobody has any idea of how a separation could occur or what would happen. Presumably, a country could withdraw unilaterally as rapidly as it wished—after all, the Bank has no enforcement tools except economic ones. However, the bureaucrats might take longer to decide on and institute an eviction.

A Possible Recession: The most likely trigger for failure would be a decision by the strong euro zone countries to stop lending more money to one of the struggling countries, resulting in the weak country’s default on its obligations. Such a massive default could severely hurt many major European financial institutions—the costs of dealing with Iceland’s 2008 collapse are still depressing the European economy—and an even larger collapse could result in recessionary pressures on the entire euro zone.  But, overall, the remaining euro zone countries would still be an economic powerhouse, and after a period of adjustment, they could continue without one or more small, wayward members.

A Default Country

Although the rest of the euro zone would undoubtedly continue to prosper, a country leaving the euro zone would have some serious problems, starting with a weak economy and a weak replacement currency. Here, we have some historical guidance.

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• Often, a country with debts it can’t cover resorts to inflation—or at least permits inflation —to devalue the debt. When that happens, local businesses tend to shun the national currency and transact business in a more stable currency, such as the U.S. dollar or the euro. As a result of shekel inflation, for example, the U.S. dollar became Israel’s de facto currency through the early 1980s. Several Latin American countries have actually adopted the U.S. dollar as their official currency, and several others officially peg their own currency to the dollar. A few do the same with the euro.

• On the other hand, a country with a reasonably sound economy and that isn’t overburdened with debt often devalues its currency to stimulate tourism and exports.

Impact on You

The main impacts of any euro zone failure scenario would fall on Europeans. For visitors, the impacts would probably be transitory and fairly minor:

• In Euro Zone Countries: Fracturing of the euro zone could lead, at least for a few years, to better exchange rates against the dollar, favoring U.S. travelers. But shifts would probably be relatively small and relatively slow, and Europe would not turn into a “budget paradise” to any significant degree.

• In Defaulting Countries: Just about anything could happen. A devalued currency, if it remains stable, could mean really good deals for visitors. For several years following the 1997 Asian financial crisis, for example, much of Southeast Asia became a real bargain for visitors from strong-currency countries. That would be a best case scenario. Runaway inflation, on the other hand, makes travel more difficult. Travel businesses in affected countries try to peg local prices to dollars or euros and transact as much business as they can in hard currencies.

What Really Matters to Visitors

Decisions by tourists whether to visit a given country or area are much more affected by what happens in the streets than by what happens in the banks. Travelers to Greece these days are more concerned about getting caught in civil unrest than they are about low prices; despite some good resort deals, travelers avoid Acapulco because they really don’t want to become collateral damage in a drug war. Those developments, rather than exchange rates, are likely to govern tourism patterns over the coming years.

The lesson for most North Americans: Don’t figure on any big changes in costs of visiting most of Europe, one way or the other. Keep a close eye on the headlines to avoid visiting places where you might encounter violence. And if you have to prepay more than a few hundred dollars, buy cancel for any reason trip insurance so you, not the bean counters, can decide how to respond to what happens on the ground.

Euro 101

For anyone who needs a quick primer to bring them up to speed: The euro is the multinational currency in use throughout the euro area or euro zone. Current membership consists of 17 member states of the European Union (EU) that have adopted the euro as a common currency: Austria, Belgium, Southern Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovakia, Slovenia, and Spain. Although not official members of the EU, Kosovo and Montenegro have also adopted the euro as their currency. And several but not all 10 non-euro members of the European Union plan to join the euro zone within the next few years. 

Looking Ahead

Press reports are long on such terms as “crisis,” “chaos,” “collapse,” and even “civil war” to describe what might happen in some sort of euro failure, but they’re very short on exactly what they mean by those dire terms. So what could actually happen? Nobody knows—or at least nobody is saying.