Even as the euro zone speeds towardsa potententially disasterous crash, most people are assuming that a miracle will occure because European leaders will do whatever it takes to save the single currency. A euro break-up would inevitably cause a global bust worse even than the one in 2008-2009. The world's most financially integrated region would surely be torn apart by defaults, bank failures, and the imposition of capital controls. The odds of a miracle recovery are dwindling fast.
Most of the cause stems from the fact that panic has rapidly proliferated across European banks. Their access to wholesale funding markets has almost completely dried up, ensuring minimal to no economic profit. As banks refuse to lend to each other and large national firms begin pulling deposits from peripheral countries' banks, these acts of blatant fear lead many to believe hope is becoming lost.
"The Economist" predicts due to the collapse in business and consumer confidence, there is little doubt that the euro zone will see a deep recession in 2012, with a possible fall in output as much as 2%. Past fiscal crises show that the only further prevention of this downward spiral comes from bold policies to regain market confidence. The only institution that can provide immediate relief id the ECB. Vast monetary loosening should cushion the recession and buy time.
However, the future of the Euro Zone looks exceedingly bleak. As many companies expeirence a temporary shutdown in the short-run, even the most skilled economists can not truly accurately predict what will happen to the euro zone. Only time will tell.
Information taken from 'Is this really the end?' -- "The Economist" December 2011
The possibility of an economic meltdown worse than the one experienced in 2008 is a very scary thought. Unfortunately, it looks as if this might be inevitable. Like you mentioned, the collapse of European banks would have disastrous consequences, especially if they stop lending money. I agree that in the end only time will tell what happens to the EU. Hopefully they’ll figure something out to prevent a total economic collapse.
ReplyDeleteI agree that this has a very high potential to be disastrous. The scariest part is that many Americans are not aware of it. Hopefully, the eurozone will find a way to save the euro, but I doubt that some sort of crisis is completely avoidable.
ReplyDeleteWhile the economic output of Europe is bleak, banks over the world are providing liquidity to support Europe's banks. Although this response provides optimism, it is not a long-term solution.
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