23 july 2011, and on the euro – and now the dollar too

Saturday 23rd July 2011

A tired looking angela merkel left brussels yesterday with a deal agreed at a pre-meet with sarkozy and trichet, which most seem to agree was more than papering over the cracks. They committed to more economic governance which, based, on the expansion of the european financial stability facility, will be less than a euro area ministry of finance (see 2 june 2011 ) but well beyond what we have today. Whilst the “m” bit of economic and monetary union was meticulously planned and delivered, the “e” is an abrupt and ad hoc process. We will see what they deliver in this round, and what all 27 agree to. Meanwhile, enough was done to deal with the immediate issue of greece. The deal, with bondholders taking a 20% haircut, will see the rating agencies declaring a default, which will hasten the serious money already leaking from euroland, but should be enough to enable the system to manage that through in the short term. Whether it is enough to set greece on the road to recovery, to dam off contagion to the other piigs (definitely two eyes) or to stop the increasing mis-association of the eu polity in the public mind with pouring taxpayers’ money down a somehow greedy bankers-linked black hole, we shall also have to see. Probably not, as the write-down surely needs to be bigger, and the transformation of the greek economy towards productivity and growth hardly begun. Meanwhile, as well as the euro teetering, the absolutely unthinkable across the atlantic is also somehow getting out of control, and there is a chance that the usa too may default, so too making the dollar teeter. Mark blyth sums that up well, talking about america’s enormous long-term fiscal gap and dependence on china, with the us economy " like wile e coyote who runs off the cliff and it takes him a while to realise it. What has been keeping him up is chinese blowing air up”. Suddenly global macroeconomic meltdown is right on the immediate agenda again. Short-term this is all going to shore up boutique operations like british gilts and of course gold, but any global tsunami will wash over us all, big time. No need for the ark just yet, but its time for the wellies.