Claus Vistesen

Is the Eurozone Heading Off a Cliff?

Thanks for comments guys ... also the ones on my english language skills; and yep, English is my second language (I really mean this). I appreciate JoeG's comments since all I can do is move forward and learn with each piece that I write. At the end of the day, I don't want my sentences to be difficultly read. Oh and to bbzz24 ... thanks for your related comment too; it assures me that I am not completely off the chart.

Anyways ... on to the business at hand.

First of all there is the comment made by Junky about the potential demise of the Euro. I don't see it like this at all. I think it is quite far fetched to speak of a Eurozone break-up at this point since the costs would be too great (after all). That does not mean however that there won't be challenges. For me, Italy is the biggest "if" since at some point in the future they will possibly have to default on their debt. I am not sure what the ECB would/could do in such a situation? One could also imagine some kind of knee jerk Italian ultimatum with respect to the Euro system; especially in light of the fact that Berlusconi is at the rudder.

Another point would be if e.g. Spain, or perhaps the aforementioned Italy falls into a very severe deflationary recession on the back of the current mess. It would be very difficult for the ECB to accomodate such a scenario I think. Of course, some kind of EU transfer in kind might be a possibility here. But where does this leave us with the whole convergence and one-size-fits all monetary policy hypothesis? Ultimately, the ECB may be facing a credibility backlash as a result of the current myopic focus on inflation.

@Bbzz24

I completely agree with the main thrust of your argument. It makes little sense to invoke this US v. Europe football match since these are two different regions/economic structures. However, in this light specifically it also worries me to hear Trichet speaking, at one of the press conferences, about how the ECB is like the Fed, in that it presides over one homogenous economy. This is BS (!) and acting accordingly will only bring tears I think.

"Consider this: budget deficit spending is 2x the annual GDP growth for quite some time!!! How is this possible? Well, the Chinese and Japanese are willing, so far, to fund the U.S. growth in exchange for future claims against the government and the U.S. taxpayer."

Quite, this system is obviously unsustainable in its current form and with the velocity it is growing. However, my guess is that this is structural in the sense that e.g. Japan cannot
do anything else than hope to live off of claims on more "vibrant" (read: young) economies. Yet, this does not mean that emerging market mercantilism and the subsequent US overconsumption won't come to an end. My guess is that the system is crumbling as I type since the US is well under way to transform into a different economy. I won't be easy and it won't be painless but it will happen ... gasoline tax anybody :)?

Cheers

Claus