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Wither Now the Euro?

Written By Brian Hicks

Posted July 18, 2008




With the U.S. dollar trading near its lows, everybody wants to beat down the greenback these days. 

But with the Eurozone tumbling into an abyss of its own you have to wonder how long the Euro can hang on to its valuation versus the almighty buck.

So that begs the question of how long the Eurozone itself can keep it together in the first real economic test of the European Union.

After all,the cracks across the Atlantic are beginning to grow.

Here’s the skinny from across the pond.

From the UK Telegraph by Ambrose Evans-Pritchard entitled: European recession looms as Spain crumbles

“The eurozone is tipping into a deeper downturn than America itself despite the tremors in the US mortgage industry, and may already be in full recession for the first time since the launch of the single currency.

Industrial production for the EMU bloc fell 1.9pc in May, according to fresh Eurostat data. It is the sharpest one-month decline for the region since the exchange rate crisis in 1992. Officials in Berlin have warned that Germany’s economy could contract by as much as 1.5pc in the second quarter as export orders crumble.

Industrial output in both Italy and Greece has slumped 6.6pc over the past year. Portugal is off 6.2pc. “It is a very ugly picture: we’re on maximum alert,” said Emma Marcegaglia, head of Italy’s business federation Confindustria.

Rome is now lobbying for a “New Deal” to revive Italy’s economy through massive infrastructure projects.

The idea is to use bonds issued by the European Investment Bank, allowing EU states to circumvent the 3pc limit on budget deficits imposed by the Maastricht Treaty.

Jacques Cailloux, Europe economist at the Royal Bank of Scotland, said a “reverse decoupling” is now under way as Europe goes down harder than the US – just as it did after the dotcom bust. “There is loss of momentum across the board. We can’t exclude a recession,” he said.

Spain is now spiralling into the worst crisis since the Franco dictatorship. “The economy is in dire straits,” said Dominic Bryant, Spain expert at BNP Paribas.

The precipitous slide now under way in Europe has yet to cause investors to lose their ardour for the euro, but a number of analysts, including Bill Gross, head of the giant bond fund Pimco, say there is no justification for the euro’s 25pc to 30pc over-valuation against the US dollar. “We’re turning incredibly bearish on the euro,” said BNP Paribas.”