Fiona MacRae: We must ask ourselves what price we are willing to pay for eurozone

THE euro has plummeted as countries within the eurozone discover they have entered a Faustian pact. Their partying is over, but they cannot leave.

The balance of power has moved decisively in Germany's direction. This period of change will provide new opportunities for investors who can look through the turmoil and take a longer-term view of companies that will emerge as winners.

Impartial observers may see this de facto devaluation and loose monetary stance as essential to maintain liquidity within the eurozone financial system and to boost economic growth through external exports.

But the bulk of the German population heading towards retirement may view matters differently. They are a generation still haunted by the fear of inflation and its potentially devastating impact on their retirement savings.

They have been instilled with a belief in the anti-inflationary credentials of the Bundesbank and the need for a strong currency. These beliefs have now been challenged.

The ineptitude of the politicians during this crisis will have augmented their unease over the euro experiment. The assumption that Germany will pay is now not as certain, and this increased uncertainty will create a headwind for any sustainable strength in the euro.

The flawed foundations of the eurozone experiment were laid bare in the recent turmoil on the debt markets. What has perhaps been most surprising has been the speed with which the Greek crisis arose and then spread throughout the debt markets of southern Europe. After all, Greece originally only gained entry through the Maastricht criteria door by some clever accounting tricks.

It then used the cheaper credit rating afforded by euro membership to fund years of overspending – particularly by the public sector. Markets have ignored the Greek debt issue for years. The lightning rod came with the admission, by the new Greek government towards the end of last year, that previous administrations had been cooking the books and the debt problem was far worse than previously acknowledged.

There was also increased focus on the potential contagion risk. Markets started to panic, leading to the creation of a European monetary assistance fund which, with the participation of the IMF, can provide funds of up to ?750 billion.

Some view this as a critical crossroads in the history of the eurozone. But in fact, members of the club have emphatically chosen the road of further integration. Whether they can stay the course is the real debate. The rescue package at least buys time – probably around two years.

For the transgressing countries of southern Europe, the obstacles are clear. They need to use this period of respite to impose greater fiscal discipline and push through measures such as labour market reforms to increase competitiveness. No-one doubts how difficult this will be and the prospect of widespread social unrest is very real.

What the crisis has highlighted is the incomplete nature of European integration, and the solution is already seen as the strengthening of eurozone institutions. This will involve individual countries giving up key aspects of fiscal sovereignty to Europe and the adoption of a German-style rectitude to spending. Within the rescue package there is already a commitment to strengthen economic governance, surveillance and policy coordination within the eurozone. This may be unpalatable to many at a nation state level.

The challenges ahead for the transgressing nations are clear. But the key question for the members of the eurozone outwith the immediate "debt culprits" is how much are they willing to pay to keep the eurozone experiment alive? In this regard, the spotlight is firmly fixed on the largest member, Germany. The symbiotic nature of its relationship with its indebted southern neighbours is only now becoming clear. These southern nations may have used the lower interest rate profile afforded by association with German monetary policy to overspend, but this low-cost "credit" has been recycled into purchasing German manufacturing goods and to offset the low level of German consumption.

From a German economic perspective, to pay to go further down the eurozone integration route is sensible. But the German population is just waking up to the fact that they have been sold a political lie. The ECB in its latest moves has abandoned any pretence of being a reincarnation of the Bundesbank and its anti-inflationary credentials now lie in tatters.

For investors, though, European valuations are attractive, both from a historical perspective and relative to other markets. As noted, the euro is likely to remain structurally weak, which will boost the profitability of European exporters. Value opportunities are present in the shares of companies which are based in countries hit by sovereign debt woes but earn most of their profits elsewhere. Looser monetary policy should encourage higher growth in countries not facing the deflationary pressures of fiscal austerity.

Fiona MacRae is head of European Equities at Alliance Trust