Eurozone Crisis: Hope for the Best, Plan for the Worst
BY AXEL G MERK
When Greece’s woes first rattled the markets two years ago, the pundits predicted a collapse of the euro.
The resilience of the euro has been due to a number of factors, not least of which is that the eurozone as a whole has a broadly balanced current account. As such, a misbehaving bond market doesn’t necessarily cause a plunge in the currency, as foreign buyers are not required to fund a deficit or protect against currency weakness.
The euro has also been on the other side of the Bernanke trade: the Fed’s printing of trillions of dollars is a deliberate effort to weaken the US dollar in an attempt to promote economic growth. Conversely, with the European Central Bank showing more restraint, the euro has been stronger, yet that strength has exposed a host of problems.
A similar pattern was evident during the Great Depression, where those countries holding on to the gold standard longer had stronger currencies, but suffered painful fiscal and political consequences of trying to do the right thing.
The focus should be on making the financial system strong enough to stomach potential sovereign defaults. And, as no one else has been able or willing to step up to the plate, the ECB has been forced to take on the task.