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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 29, 2011 at 10:25 AM

The euro and our ugly winter ahead

News that the Eurozone crisis is causing a tightening of lending around the globe is the most emphatic sign yet that European leaders do not have a plan to save the common currency and that the consequences will ripple far beyond the continent. Even strong, stable Germany had difficulty finding buyers for its government bonds last week.

There’s just too much bad debt, too many dodgy bets, banks don’t trust banks, and the European Central Bank is unable to be an effective lender of last resort as is the U.S. Federal Reserve. Writing on Bloomberg, Peter Boone and MIT economist Simon Johnson say bluntly, “this is the beginning of the end of the Eurozone”:

The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

The prediction market InTrade now puts the odds of a complete euro collapse before the end of the year at 50 percent. But even if the Germans and French push out the weaker countries, the surviving eurozone will be much weaker. The continent is already in a recession and for some countries decades of pain lie ahead. Among the other shoes to drop: Contagion to American banks and hedge funds that have lent to European banks or done gambling on the crisis (e.g. MF Global).

Contagion won’t stop there. A Euro-recession will be another drag on slow American growth — a big one. And Washington is one of the larger trading partners with Europe among American states. Barring an attack on Iran that causes an oil-price spike, this will be the dominant economic story of the season.

And Don’t Miss: Ethics and inequality || Boston Review

Today’s Econ Haiku:

Boeing should be fine

In AA bankruptcy mess

Workers not so much

Comments | More in Debt, Eurozone, Federal Reserve, Global economy

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