Could the Euro collapse?
Even as the euro zone hurtles towards a crash, most people are assuming that in the end European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro's destruction so catastrophic that no sensible policy maker could stand by and let it happen. The world's most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls. The Eurozone were chatting to different pieces, or a large block in the north and a fragmented south. Admit the recriminations and broken treaties after the failure of the European Union's biggest economic project, while currency swings between those in the core and those in the periphery will almost certainly bring a single market to a shuddering halt. The survival of the EU itself would be in doubt.
Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, are rapidly weakening economic outlook and a pigheaded brinkmanship. The odds of a safe lately a study to dwindle. investors growing fears of a breakup of European Union have fed a run from the assets are weaker economies, a stampede that even stronger actions by the governments cannot seem to stop. The latest example of Spain. Despite a sweeping election victory in November the People's party, committed to reform and austerity, the country borrowing costs have searched again. The government has just had to pay a 51% yield on three month paper, more than twice as much as a month ago. Yields on 10 year bonds are above 6.5%. Italy is the technocratic government under Mario Monti has not seen any relief either, ten-year yields remain well above 6%. Belgian and French borrowing costs are rising. And this week, an auction of German government warns flop.
The panic engulfing Europe's banks is no less alarming. Their access to wholesale funding markets has dried up, and into that market is increasingly stressed, as banks refused to lend to each other. Firms are pulling deposits from peripheral country's banks. This backdoor run is forcing banks to sell assets and squeeze lending, the credit crunch could be deeper than the one Europe suffered after Lehman Bros collapsed. After the even greater fiscal austerity being opposed across Europe and a collapse in business and consumer confidence, there is little doubt the euro zone will see a deep recession in 2012 with a fall in output are perhaps as much as 2%. That will lead to a vicious feedback loop in which the recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards excerpts.
Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, are rapidly weakening economic outlook and a pigheaded brinkmanship. The odds of a safe lately a study to dwindle. investors growing fears of a breakup of European Union have fed a run from the assets are weaker economies, a stampede that even stronger actions by the governments cannot seem to stop. The latest example of Spain. Despite a sweeping election victory in November the People's party, committed to reform and austerity, the country borrowing costs have searched again. The government has just had to pay a 51% yield on three month paper, more than twice as much as a month ago. Yields on 10 year bonds are above 6.5%. Italy is the technocratic government under Mario Monti has not seen any relief either, ten-year yields remain well above 6%. Belgian and French borrowing costs are rising. And this week, an auction of German government warns flop.
The panic engulfing Europe's banks is no less alarming. Their access to wholesale funding markets has dried up, and into that market is increasingly stressed, as banks refused to lend to each other. Firms are pulling deposits from peripheral country's banks. This backdoor run is forcing banks to sell assets and squeeze lending, the credit crunch could be deeper than the one Europe suffered after Lehman Bros collapsed. After the even greater fiscal austerity being opposed across Europe and a collapse in business and consumer confidence, there is little doubt the euro zone will see a deep recession in 2012 with a fall in output are perhaps as much as 2%. That will lead to a vicious feedback loop in which the recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards excerpts.
