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Sunday, 4 December 2011

A New Asset For Europe?

Pic by  ¥§•ªˆ¨ˇ© LOVE © ˇ¨ˆª•§¥
Do you hope the euro zone will break apart? You should think twice.

U.S. dollar: Stronger short term, weaker long term.

World markets are experiencing an apparent calmness. Last week’s concentring intervention by six central banks has provided some relief to the European straggle. Seasonally, December has been a strong month for stocks and for the euro. World economies are nevertheless contracting and will be difficult for the U.S. to hold the fort alone. Next year, consumer spending should stay mild, while unemployment could be near the high. The Federal Reserve will keep rates unchanged for 2012 and for the first part of 2013.  What will happen to the U.S. dollar? It should increase over the short/medium term. Nonetheless, the longer-term trend picture is bearish for the greenback. Apart from cyclical reasons, fundamental components seem to anticipate a weaker currency in the years to come. Why? The deficit is huge and increasing. Cohesion is weak in Washington D.C. and a fiscal stimulus package might be impossible to be introduced. The last example is the super committee breaking apart over a budget deal.  So, a new set of quant easing is possible. It will be negative for the dollar. Demand of home currency by European banks should instead support the euro.
Hope is mounting in Europe.

For now, risk is on Europe and will stay there for the most part of 2012. Against the U.S. dollar, a decline to 1.28/1.22 is possible. The E.C.B. should cut rates to 1.00 on Thursday or in January, at the latest. Reforms are necessary, but it would be challenging to resolve the European debt burden without a well structured financial system. Germany is finally demanding a fiscal union. Europe has a great opportunity. There are no other citizens that share similar boundaries as the Europeans. The level of education is high. The work force is powerful. Nonetheless, Europe must finally become a nation, if it wants to survive. Hope are mounting that important decisions will be taken this week, when 27 European states will meet. In reality, a new treaty will require time to be implemented. Various challenges still need to be overcome. French banks, as an example, are under pressure and might ask for government assistance. Bond premiums are levitating, while economic conditions are deteriorating.  So, France’s rating could be downgraded. When?  Hopefully, it would happen after April’s political elections. Otherwise, Mr. Sarkozy, who advocates fiscal responsibility, will be tempted to give voice to the dissatisfaction of the Mediterranean states in order to be re-elected. Moving away from Germany would mark the end of the euro zone.
There are an increasing number of supporters hoping for Europe to break apart. They consider it useful for their own economy. The falling of a top economic power will be beneficial for the world?  At the contrary, the breakdown of the euro zone might have unpredictable consequences. Reactionary forces are just waiting in the shadow for the right moment to ride the beast of extremisms again. They will feed the electorate malcontent with the same unreachable promises. The never-ending cycle of promising/blaming will begin. Where will it lead?  Like it or not, America, Europe and Asia have to sail this turbulent sea together. The mess began first in the U.S. with the toxic mortgages and was exported to every corner of the world. It is only a matter of time before the illness will complete the cycle and return to where it all started. It is better to be prepared and work tight for a solution.
Angelo Airaghi,

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