Friday, January 23, 2009

Perhaps the Euro Won't Replace the Dollar as a Reserve Currency

The global recession has put enormous pressure on Euro-zone countries--no longer able to devaluate, each is yoked to both weaker economies and economies with incompatible structural needs. Given that the Euro was more political symbol than actual monetary melding, economist Barry Eichengreen thinks the Euro will survive:
The euro area will hang together, in other words, because the decision to enter is essentially irreversible. Getting out is impossible without precipitating the most serious imaginable financial crisis -- something that no government is prepared to risk.
But some suggest otherwise, as reported in the Daily Telegraph (U.K.):
A leading Irish economist has called on Dublin to threaten withdrawal from the euro unless Europe's big powers do more to rescue Ireland's economy.

"This is war: countries have to defend themselves," said David McWilliams, a former official at the Irish central bank.

"It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe," he told RTE radio.

"If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece," he said.

Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone's southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU's Lisbon Treaty.

"If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down," he said.
If Ireland doesn't bolt, Greece could be forced out if its government defaults on sovereign debt.

See also the reports of wide-spread economic discontent in Eastern Europe.

(via The Corner, VOX)

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