The euro is in danger of collapsing soon, which will lead to a second round in the global financial crisis
There are growing concerns that the euro will collapse soon. The London-based Centre for Economics and Business Research has come out to assert that the euro will drop to parity with the US dollar in 2011 before its "inevitable" breakup. The currency is now used by 16 eurozone nations.
The euro has lost about 15 per cent of its value against the dollar since the beginning of this year. Investors have sold the euro because they are worried about the debt crisis in Greece and other countries, including Spain, Portugal and Italy. Although Greece has received a bail-out, with a joint package from the European Union and the International Monetary Fund, investors believe that the measure is too little too late.
A subsequent package of US$1 trillion has also been introduced to offer a bail-out for other European countries in order to calm investors' nerves. This huge rescue package reflects the fact that the crisis in Europe is severe and deep.
The euro's decline will accelerate in the event of higher interest rates in the US. The US Federal Reserve might start to raise rates at the end of this year in order to stem inflationary pressure. The European Central Bank will keep its benchmark lending rate on hold to help prop up the recovery. In that case, the euro's fall will hasten, opening up further the possibility of the collapse of the currency.
"It's almost inevitable that the euro will break up at some point," CEBR chief executive Douglas McWilliams said in a statement. "It could be soon, it might be in five to 10 years' time," he said, adding that "in the meantime, the one certainty is that the euro will be weak".
Billionaire investor George Soros has also pointed out that the world is entering "Act II" of the crisis as Europe's fiscal woes worsen. Governments are under pressure to cut deficits in order to restore confidence, but doing so will push the global economy into a recession. Soros believes that the global crisis is far from over, and the collapse of the financial system is going to be real.
The current situation in the world economy is similar to the 1930s, with governments under pressure to narrow their budget deficits at a time when economic recovery is weak. But today's global financial markets have become more sophisticated and complex, creating even more challenges, and possibly leaving no way out. Financial assets have become larger than real assets. We're now being drowned by paper wealth on top of paper wealth.
This year some $4 trillion has been wiped out from global stock markets. Moreover, Europe's debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance. The question is where all the money will come from? With the rating agencies starting to get their act together, government debts will be downgraded. This will result in higher borrowing costs.
Investors will be demanding higher rates for the associated risk. Japan's new leadership is also looking forward to addressing high government debt. The outlook is very gloomy for Europe and the world as a whole.