The euro was adopted on January 1st, 1999, so the currency is about to turn 13.
I’m not a conspiracy theorist, or a numerologist, or a triskaidekaphobe. But 13 might turn out to be a very unlucky number.
I’ve written little on this blog about the sovereign debt crisis in Europe, although I did wonder in late October if the euro might collapse. I’m not predicting a collapse, but it’s clear that prospect is no longer as remote as it was then. I feel like we’ve been watching a slow-motion train wreck for months and months — with time still left to prevent it. But that time is getting shorter.
From the Financial Times’ Business and the eurozone: Looking for the exit:
As politicians prepare for another make-or-break European Union summit in Brussels on December 9, the persistent inability of governments to find a comprehensive solution to the eurozone’s troubles is forcing companies, especially big multinationals, to think the unthinkable.
Apocalyptic visions considered in boardrooms across Europe range from bank failures and the collapse of credit to the destruction of the EU’s single market, mass social unrest and a recession or worse. Even the most benign of that range of outcomes would have repercussions well beyond the eurozone – making the issue one of consequence to businesses and government officials worldwide.
Although the UK, for instance, is not part of the single currency, the euro area accounts for 47 per cent of the value of its exports, making it inconceivable that British companies and banks could escape the consequences if it were to unravel.
From the FT’s Businesses plan for possible end of euro:
“Market participants and, increasingly, real businesses are pricing in a break-up scenario,†said Jean Pisani-Ferry, director of the Brussels-based Bruegel think-tank. “It is still hard to think the unthinkable, let alone to work out the details of it, but any rational player has to consider the possibility of it.â€
Tim Duy’s Fed Watch has been providing some excellent and very clear commentary, including this from the post More Europessimism:
This is my fear – that Germany and France continue to press ahead with the “austerity first” plan, with the ECB cheering them along. Unequivocally, this is not going to work. It hasn’t worked yet, and there is zero reason to believe that it will in the future. All Europe is doing is setting itself up for greater speculative attacks as each new turn toward austerity pushes the deficit targets further out of reach.
We are setting the stage for a massive counter-example to the US reaction to its financial crisis. The US allowed the fiscal deficit to swell while force-feeding capital to the banking sector (not enough, but that is another story). Europe is pushing for massive fiscal austerity and, to prevent additional fiscal borrowing, pretending that the banks can survive via “liability management exercises.” If you think the US would have been better off shrinking the deficit while letting the banking system collapse, it is time for you to go long on Europe.
For the rest of us, enjoy the policy-driven market upturns while they last.
From Deutsche Welle’s Eurozone minister agree to boost rescue fund:
As investors flee the eurozone bond market, panicked by doubts about the very future of the single currency, eurozone finance ministers moved late on Tuesday to allay those fears by expanding the bloc’s rescue fund. But it’s not yet clear quite how much firepower the fund will have.
Initial hopes of boosting the European Financial Stability Facility (EFSF) from its current 440 billion euros to 1 trillion euros appeared to be dashed due to lack of investor interest.
From Austan Goolsbee’s Europe’s Currency Road to Nowhere in the WSJ:
Northern Europeans argue that the crisis comes from too much spending in the South, so they demand cuts. They believe that cuts can restore stability to the euro zone, but the endeavor feels increasingly Ludwiggian [a reference to the mad king].
Certainly the countries of Southern Europe must rein in excess. In the long run, however, even the deepest of cuts won’t suffice. Southern Europe needs to grow or it will never control its debt levels. But with the euro zone keeping Southern Europe uncompetitive, the region’s growth prospects will remain dismal. [. . .]
So even if Europe addresses the banking-capitalization crisis of the moment, and even if it struggles its way through the near-term fiscal crises of Greece and Italy, then what? With little prospect for growth in its South, Europe remains on the romantic road to nowhere—a road that merely runs in a circle. Without growth there will always be another fiscal crisis ahead for yet another country unable to balance its budget but prevented from devaluing and exporting its way forward.
European leaders and the European Central Bank might yet come up with a fund big enough to handle this crisis, but there have really been no signs of that happening.
I suspect we’ll hear some increasingly frantic buzz about the Federal Reserve intervening in some way — as a source of liquidity or as a buyer of bonds here or there. But such steps would be meaningless if there isn’t more resolve from Europe.