Intensified fears over government debt in the eurozone are pushing the euro weaker against the dollar. The G7 achieved nothing over the weekend, the IMF is stuck on the sidelines, and the Europeans are sitting on their hands at least until a summit on Thursday. There is a lot of trading time between now and then – and most of it is likely to be spent weakening the euro further.
The UK also faces serious pressure, and there is no telling where this goes next around the world – or how it gets there.
There may be direct effects on the US, as our banking system remains undercapitalized. Or the effect may be through making it harder to export – one of the few bright spots for the American economy over the past 12 months has been trade. But this is unlikely to hold up as a driver of growth if the euro depreciation continues.
Some financial market participants cling to the hope that the stronger eurozone countries, particularly Germany, will soon help out the weaker countries in a generous manner. But this view completely misreads the situation. Continue reading