So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.
The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.
One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. According to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.
Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.
I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.