Crisis to Push Euro Lower
Some currency experts are saying that the Greek debt crisis could provoke a split between the US Federal Reserve and the European Central bank pushing the multi nation currency even lower. In Europe the withdrawal of stimulus measures could lead to double dip recession and deflation. The possibility of stalled recovery has prompted experts from several financial institutions to predict that the European Central Bank will be slow to raise rates further damaging the euro. Many economists fear that Greece’s debt problems could spread to other EU nations such as Portugal, Spain, and Ireland and are pressing these governments to deliver on their promises to implement austerity measures. The euro fell 0.3% against the US dollar to $1.3515 and the euro has fallen a full 10% in the last four months. Recent euro declines have been prompted by speculation that no solution to Greece’s fiscal woes will emerge from Thursday’s EU summit. During the past decade several EU countries have violated EU rules limiting deficits to 3% of gross national product. The Greek crisis has prompted EU nations to implement greater fiscal discipline especially after investors doubled the risk premium on Greek 10 year bonds. Presently Greece has a 12.7% budget gap, the largest in the EU.
EU Nations Struggle to Close Budget Gaps
Other EU nations have promised to bring their budget gaps in line with EU rules by 2013 after the European Commission estimated that the EU’s budget gap hit 6% in 2009, up from 2% in 2008. The commission has forecast an increase to 6.9% in 2010. Laurence Boone of Barclays Capital in Paris stated, “Events in Greece could trigger unusual fiscal discipline in the euro area, implying tighter policy than expected.” Spain is cutting 50 billion Euros from its budget and may raise the retirement age to 67. Portugal is cutting 6 billion Euros and is considering asset sales to close an 8% budget gap. Ireland is planning wage cuts for public workers in addition to welfare cuts to address an 11.7 budget shortfall. Despite the fact that the euro zone economy grew in January unemployment remains at 9.9%, an 11 year high. Euro Zone retail sales fell 0.3% from December 2009.
US May Have Deficit of 10.6% by Year’s End
In the US the Obama administration is forecasting a deficit of 10.6% in 2010 and 8.3% in 2011. Mid term elections are hampering political solutions in the US and legislators are wary of proposing any tax increases or cuts in government programs.
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