Eurozone crisis threatens global economy
Written by Simon Tilford, 28 November 2011
If European leaders don't agree to take bold economic measures for more fiscal integration, including allowing the European Central Bank to become the lender of last resort, the eurozone could start to unravel, said Simon Tilford of the CER. The eurozone's future could be decided next week when leaders meet for a summit on the sovereign debt crisis on December 9. If they leave empty handed, Tilford said, fearful depositors could pull their money out of European banks en masse, causing European banks to fail. In a "vicious death spiral," said Tilford, troubled European countries would stop being able to borrow money as borrowing costs reach unsustainable levels. Then a string of European countries could default and leave the eurozone, leading to its collapse ... Devaluing their own currencies would boost the competitiveness of their exports, allowing countries to grow and pay down their debts, Tilford said. Since countries such as Greece and Portugal have "very weak economic growth prospects ... they need a weaker currency," ... If they can no longer borrow money, they effectively would be forced to default on their debts and leave the euro ... A breakup of the eurozone would cause several negative repercussions for the U.S. economy and emerging economies in particular, Tilford said. As investors flee for safety in the United States, the value of the U.S. dollar would rise, making U.S. exports more expensive around the world and causing their sales to fall, he said. American banks would be forced to swallow major losses on European investments and would lend less ... though the Federal Reserve would likely prevent them from failing by becoming their lender of last resort. American investments in Europe generally would plunge in value ... The negative blow to US confidence would generally curtail risk-taking and investments in the US ... Emerging economies would also experience a sharp slowdown because they are dependent on Europe for both financing and consumer demand for their goods ... European banks provide about three quarters of all loans to emerging markets, according to Tilford, and a breakup of the eurozone would cause many European banks to either fail or slash lending. If the eurozone breaks up, a cloud of uncertainty would likely hang over Europe as long as companies struggle to work out contracts that were done in euros ... "How on earth do you untangle all the contracts? Because they are all in a currency that would cease to exist ... They would need to clarify who owns what and under what currency if capital is going to return to Europe."
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