Sunday, May 9, 2010

As The European Economic Wheel Crushes You Underneath

The political wrangling in Britain would be fine in normal times; obviously we aren’t. It’s assumed that Gordon Brown and his Labour government are on the way out, and yet Darling, the exchequer chancellor (equivalent of Treasury Secretary), is negotiating Britain’s position on the euro stabilization fund.

Darling has taken the position that any aid to support the euro as a currency must be taken by countries within the eurozone. (Note from Le Figaro: Sweden is also against it; my French isn’t awesome, so I may have misunderstood, though I doubt it.) He does support a 60 billion euro aid fund to aid countries in trouble, which is to say, almost certainly not enough: considering it took 100+ billion euros to save Greece, it’ll take similar injections to help Portugal and Spain.

Keeping things parochial here: this is perhaps the worst outcome for the U.S. A falling euro will make U.S. exports more expensive, and more expensive U.S. exports means fewer U.S. exports, which means a wider trade deficit, which means more borrowing from China and Germany. The inadequacy of the aid (which apparently is supposed to send a “strong message” according to Le Fig, snort snort) will only drive interest rates higher and require bigger cuts in the eurozone, which has predictable problems.

So while we might have had a nice job report (and mixed peripheral statistics), we ought to be in crisis mode still: we haven’t yet finished whistling by the graveyard. This is an opportune time to remind Jean-Claude Trichet to pull the Helicopter Ben Bernanke out of his central bank toolbox. Trust us: you can roll the Germans. And if you don’t, well, we’ll have Financial Crisis II: This Time It’s Sovereign.

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