Monday, February 08, 2010

Euro Challenges and America's Fate

With PIGS (Portugal, Ireland, Greece and Spain) under pressure, Euro experiment of 'monetary union' without fiscal consolidation aka political union is coming under stress. By now limits of monetary union without political unity are obvious. Apart from diminishing chances for Turkey to join EU, it makes it very clear that for at least next couple of years Europe will be fully self engrossed in their existential challenges. Not that rest of the world is going to miss anything here, but less capable Europe will make more space for China, India, Brazil, Russia, South Africa, South Korea and Australia in international relations.

No, Euro as a currency will not crumble in the end; it will muddle along. Germany will extend their dough to these laggards of Europe. French, other relatively wealthy nations in Europe an even IMF in the end will lend the money to sick economies of Europe to avoid total breakage of Euro. But chances of Euro becoming any contender for reserve currency are completely gone for now. Potentially the character of Euro and EU would change too. This is because finally people would start realizing corruption, collective deception and in general 'inability to govern' of Greece. Many wealthy Europeans will be reluctant to bail out Greece continuously. Internal fissures within Portugal and Spain can no longer be ignored. The whole issue of collective govern-ability will become important. Because of that, despite crushing debt, functional democracy and governable society would render UK as ultimately a saved basket case. My bet is UK will avoid joining PIGS even though many market analysts suspect so.

Coming to USA, the question is will American political system deliver or will it succumb resulting America as effectively 'non-governable' country failing in the end under the mountain of debt and ever increasing burden of entitlement? So far the performance of Obama Administration and Congressional Democrats have been weak. They have time only till Nov 2010 election to effectively answer this question - whether America joins PIGS (non governable sovereigns with crushing debt) or it is a usual America which renews itself successfully at every turn of crisis.

The victory of long odds New Orleans Saints in Super Bowl at least points to the American Spirit of renewal. We will see whether the same spirit helps American Economy and Political Establishment.

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