Posts Tagged ‘Paul Krugman’

A Crossroad for the Eurozone’s Survival

May 9th, 2010 Michael McDonough Comments off

Europe’s rapidly escalating out-of-control debt crisis has brought about a rare occurrence, solidarity amongst its members; an elusive attribute in the European experiment.   Eurozone members, who have worked tirelessly over the weekend, appear to have agreed on creating a $645bn loan package to help defend its currency and stymie fears of Greek contagion to other countries.  It is still too early to tell whether or not Europe’s new found cooperation will be enough to restore investor confidence, but the Euro has regained some ground in Asian trading.  The true test will come in its ability to bring down skyrocketing yields for Portuguese and Spanish debt, which has come under the microscope of investors due to each countries’ weak fundamentals.  Portugal’s close mirroring of Greece just prior to that country’s breakdown may have been a major catalyst to the creation of this unprecedented loan package—along with a free falling euro.

If this package fails to bring down yields for Spanish or Portuguese debt or stabilize the Euro this situation will very quickly escalate out of control with the potential of tearing apart the Eurozone.  Many already believe the best solution for Greece with but to withdraw from the EU, and return to the Drachma, which only a few months ago would have been an unspeakable idea.  However, historically these types of programs tend to work, or at least stabilize the situation and buy more time for a more permanent solution if necessary.  Nevertheless, a bigger risk may lie ahead for Europe in the form of a double dip recession brought on by austere fiscal policies necessary to repair most member nations ailing budgets.  The EU’s weakest members, commonly referred to as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) could find it extremely difficult to survive another recession.  Think about someone who has maxed out all of their credit cards, and is about to take a large pay-cut at work.  The only difference here is these countries are indebted to more than just a few credit card companies…

The next twelve hours will be critical for Europe, however, investors mustn’t forget about the next 12 days or 12 months either as this package could prove to be a Band-Aid for a much deeper wound.

Early comments from Paul Krugman raise some good points, but aren’t promising for either Portugal or the rescue package. But, I think the precipitous drop in the euro is indicative of plunging confidence in the region, and both aspects need to be addressed simultaneously.

“I’m not encouraged by the remarks of some of the leaders, who keep talking about protecting the euro as if speculation against the currency were the problem. Actually, a weak euro helps Europe. Speculation against the debt of weak nations is another matter; will they have any real answer to that problem?”  -Paul Krugman

Krugman’s Blog