Euro Falling, US Recovery Under Threat

The soap opera in Greece continues with Germany and France tugging on opposite sides of the rope, and support for Golden Dawn, an alleged neo-Nazi party rising in the wake. French president François Hollande is on the sidelines, not wanting another battle with German chancellor Angela Merkel who has her own set of problems.

BRUSSELS — Throughout Europe’s debt crisis, northern European leaders have often said they will not stand for taxpayers having to fork out for other countries’ problems, and the notion of “taxpayer-funded bailouts” has taken root. Yet despite three-and-a-half years of debt and banking turmoil, with bailouts totalling more than 400 billion euros, northern eurozone taxpayers have not actually lost a cent.

MOST of the time, American economic trends closely track those in Europe and vice-versa. When growth in one slows so does growth in the other. When one's economy tanks so does the other's, as in late 2008. And when recovery begins in one, so too does a rebound begin in the other, as in mid-2009. Sort of. In fact, America managed slightly better growth in the early years of the Great Recession than did the euro area.

As the week draws to a close, there are three independent drivers in the foreign exchange market.  The first two are the weakness in the yen and sterling.  The third is the push higher in the euro. 

A small dose of reality has set in for a group of European central bankers: Euro Officials Begin to Weigh Greek Exit as Euro Weakens. Greece’s possible exit from the euro moved to the center of Europe’s financial-crisis debate, rattling markets as authorities in Athens struggled to form a government.

By Simon Johnson The finance ministers and central bank governors of the world gathered this weekend in Washington for the annual meeting of countries that are shareholders in the International Monetary Fund.  As financial turmoil continues unabated around the world and with the IMF’s newly lowered growth forecasts to concentrate the mind, perhaps this is a good time for the Fund – or someone – to save the world.

Seoul: They say it's difficult to prevent the next crisis while the last one is still going on. Eurozone leaders have been learning that the hard way. In recent days they have almost single-handedly brought on a mini-panic over European sovereign debt which has sent bond yields on the periphery to new highs, and leaves the euro about two cents lower against the dollar than when the leaders got on a plane to Seoul.

By Peter Boone and Simon Johnson The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one.  The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell.  The spreads show all you need to know: a very clear and large contagion risk.