Thursday, November 10, 2011

Euro

I am very much afraid that the euro zone is about to plunge us into phase two of the global financial crisis--and that as with the Great Depression, phase two may be even worse than the dismal years we've just endured. 


In search of fairness, we may all get a lot more justice than any of us really wants. 




Martin Wolf says that the eurozone is unlikely to survive. Paul Krugman is saying the same thing.I’ve been saying it too. But one thing’s for sure: a euro breakup is emphatically not priced in to markets. So fasten your seatbelts: it could come sooner than you think. 



It is pretty much clear that we are fast approaching this point of 'no return' on Europe. Some of the observations for a common person are:

- Both Greece and Italy are unlikely to get any money from any international lenders in market or from ECB on a sustained basis, even though here and there money will be available for borrowing. This would mean you are looking at hard default of these states at some point with grave consequences for the people of these countries. Shenanigans of politicians in these countries would have convinced people of these countries, other Europeans and world at large that capacity of Politics of these nations to face their own problems is dramatically below the threshold needed to get out of this crisis.

- ECB may try to lend from time to time. But unless it is practically able to cross over the 'ultimatum' of Germans in not lending too much (since after all entire credibility of ECB is based on German strength); in the end it may not prove to be sufficient.

- As Italy goes down, France would start looking shakier. The Politics of the country is alive and in a bid to address Market pressure, it will continue to push down more and more draconian measures on French People and Economy in order to save it's AAA rating. Any time that rating goes down, Euro based on Franco-German strength gets another mortal blow. In French bid to save its AAA rating, austerity and taxation would continue harshly crippling growth prospect and bringing down Europe further. With the near certain ascend of Socialists by mid-next year in the French Politics, it is even less probable that necessary 'realignment' of generous state entitlements of French People with diminishing scope for further taxes while a requirement to compete globally; all that can be achieved. In other words, Politicians will continue to fail in being frank with their own people.

Question is are there things which USA, China and rest of the world can do to their respective economies to reduce this impeding shock and will there be necessary political consensus to achieve that. With highly partisan politics, USA does not seem to have that political strength. Republicans will continue to point the need of austerity and no new taxation (their agenda) so America does not go along the path of Europe whereas Democrats will continue to raise the issue of 'fairness' like Germans. It will be interesting to watch if Obama and Democrats sense an opportunity to  strike 'any deal' with GOP to give boost to Dollar as one of the few 'standing Western Political Systems' capable of facing its issues head-on. We will not have to wait too far, in couple of weeks or so Congressional Super Committee will have to speak to the nation about where they are and we will know.

Just as after the WWII, intact American Industrial base gave an edge to American Economy over recovering Europe, there seems to be an opportunity for American Political System to project the last man standing economy of the West of certain size. (There will be many non-European Western Economies which will be still intact like UK, Sweden, Canada, etc.) We will see whether American Politicians size this opportunity or not, though chances are dim.


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