Can the euro survive?
Jan 08, 2010
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It looks as though 2010 will see the euro knocked "off its stilts", says Ambrose Evans-Pritchard in The Daily Telegraph. Government finances are "racing towards unsustainability" in the eurozone periphery, says Ian Campbell on Breakingviews. Sovereign defaults "are a real possibility" and "years of dangerous political and economic struggles lie ahead".
Greece, where public debt could soar to 150% of GDP in five years without decisive action, is the main worry. But Ireland and Spain are in a similar pickle. Low eurozone interest rates stoked unsustainable credit booms and soaring wages and prices. Without control of interest rates or currencies, the only way to regain competitiveness is through lower wages and prices.
That means "years of low growth, high unemployment" and "discontented populations", which could bring down governments, notes Campbell. But austerity and deflation could make debt problems worse. The former implies lower tax revenues and the latter raises the real value of debt. This raises the spectre of countries having trouble just paying the interest on their debt. Juergen Stark of the European Central Bank (ECB) has said that the EU would not save Greece, although an IMF bail-out is another possibility.
But however any potential bail-out is structured, the broader worry is that Europe's Economic and Monetary Union is "inherently dysfunctional", says Evans-Pritchard. One central bank sets an interest rate for countries at different stages of the cycle, while there is no strong central fiscal authority to transfer money to ailing states. The ECB could even raise interest rates as Germany and France recover, squeezing the periphery harder.
As concern over the eurozone's viability mounts, there are plenty of reasons to expect a dollar bounce this year. Firstly, it's hardly expensive, says Lex in the FT. On a trade-weighted basis, it's 25% below its average level since 1980. A flight from risk as global growth disappoints or further financial turmoil emerges would boost the greenback, while strong US growth would bring interest rate rises closer. In both cases, dollar carry trades would unwind, giving the dollar additional pep. Morgan Stanley is pencilling in a dollar rebound to $1.37 (down from $1.44 now) by mid-year.
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