A Smaller, Core Eurozone

BI:  German and French officials have discussed the possibility of a smaller eurozone made up of fewer, stabler member states.

Remarks by French President Nicolas Sarkozy today about a two-speed Europe suggested this possibility, in addition to the deepening divide between countries that do and do not participate in the currency.

From the Reuters report:

"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

Evidently, this issue has long been up for debate, but the possibility that a core euro of fewer countries has never been so real.

Peripheral countries like the PIIGS would likely oppose such a move, which would inhibit their access to the financial strength of economic powerhouses like Germany and France. The Netherlands and Austria would also be likely to mount staunch opposition even though both would be on the short list to join such a core eurozone, according to the report.

The report mentions the possibility of "one or more" countries leaving the eurozone, however analysts have long speculated that the eurozone could shrink even more markedly. Such a transition could be dramatic, with speculators gambling against states that decide or are forced to leave the currency.

On the other hand, a two-tiered system would likely strengthen the core.

From an unnamed EU official:

"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part."

UPDATE: Now an EU official has denied these rumors, according to Bloomberg.

Given EU leaders' lack of transparency in discussing possibilities for a eurozone endgame over the last few months, however, we'd say nothing is certain.