Despite the euro zone being in recession, the euro is dramatically rising against the US dollar, from $1.20/euro in July to $1.36 today. Why, because massive European Central Bank (ECB) action prevented Spain from collapsing, and the ECB is fast becoming an inflation hawk and has thus started to shrink its balance sheet, until, of course, the southern European countries go into recession and the ECB again loosens monetary policy.
Tag Archives: euro zone
Euroland, no Disneyland
To keep Spain and Italy in the euro, the ECB must buy Italian and Spanish bonds, as nobody else will. And, it can only do so if Merkel allows it. Separately, there’s the possibility that the German Constitutional Court will prohibit Germany from contributing to the European bailout fund. Assuming Germany green-lights everything, Italy may still need a bailout, as growth is dismal and debt-to-GDP is already excessive at 120%.
The Name is Bond
The ongoing euro-zone debt crisis has been a borrowing bonanza to both Switzerland (not part of the EU) and Denmark (part of the EU but not the euro-zone). On Tuesday, Denmark issued 2-year bonds with a yield of -0.223% while Switzerland issued 3-month debt yielding -0.79%. This means investors will be repaid less than they originally lent. Talk about investor fear! For these two governments, it literally pays to borrow!
Be Like Us
The core euro problem is the dramatic differences in economic performance of the 17 member countries. Germany’s a star, the PIIGS aren’t. By sharing the euro devaluation is not possible. Moreover, the Germans won’t tolerate inflation, and labor mobility is low. The ideal solution; have richer countries perpetually support the poorer countries. It’s what we do here, via transfer payments from rich states (CT) to poor states (WV) via Washington.