The European Crisis Gathers Force
Ed Harrison:
Credit Revulsion in Belgium, France and Austria: Yes, the periphery looks bad. But look at Belgium, Austria and France. That’s the euro zone core. As I predicted in August and reiterated most recently last week when I saw Belgium’s CDS indicating a one in four chance of default….
My hope is that Europe moves to address the medium- and long-term issues before the crisis flares. However, I don’t anticipate they will….
Belgium is clearly suffering some serious credit revulsion. France and Austria are being carried in tow. That’s where we stand now. The word is that the EFSF will get levered up and banks will be recapped. This may provide some relief but ultimately the euro crisis is more fundamental. Martin Wolf is right when he writes:
The fundamental challenge is not financing, but adjustment. Eurozone policymakers have long insisted that the balance of payments cannot matter inside a currency union. Indeed, it is a quasi-religious belief that only fiscal deficits matter: all other balances within the economy will equilibrate automatically. This is nonsense. By far the best predictor of subsequent difficulties were the pre-crisis external deficits, not the fiscal deficits
Deciding between breakup and deep fiscal integration is the only long-term crisis remedy.
