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European Debt Crisis

Could the euro be on its last legs?

Jeremy Hobson Nov 25, 2011

Jeremy Hobson: Italy had a bond sale and ended up paying more to borrow money than its had to pay at any time since joining the euro.

Marketplace’s Stephen Beard is with us live from London with the details. Stephen, what happened in Italy?

Stephen Beard: Well, the Italian government sold all the bonds it was trying to sell — but, at a cost. As you say, investors demanded a much higher rate of interest than before: almost 8 percent. This is part of an accelerating trend across the eurozone. Now, investors are getting more and more nervous about the euro. What they’re saying is: we don’t really want to buy these bonds until the eurozone governments take radical action to stop the crisis.

Hobson: We knew that Italy was in trouble already. Do we now have to start worrying about countries further up the chain?

Beard: Well, we’ll see. We’ve got more bond sales next week — from Belgium, Italy (again) and France —  with the prospect of another upward move in borrowing costs, if eurozone governments don’t take radical action. This can’t go on indefinitely, of course, eventually a eurozone country will default, and that could precipitate the breakup of the euro.

Hobson: Marketplace’s Stephen Beard in London. And let’s get reaction now from Chris Low. He’s chief economist with FTN Financial. And he’s with us from New York as he is every Friday. Good morning.

Chris Low:Good morning.

Hobson: So it does sound like things are getting worse in Europe. Are the stakes getting bigger here?

Low:They absolutely are, and that’s — you know, what’s interesting, watching this from the sidelines, we talked to a customer who’s an Italian banker the other day who said, “Look, it’s beginning to feel like we’re going back to the lira, which means I’m the loser anyway. But I’d rather do it by going to the lira now, than first going to austerity, then losing my job — and then going to the lira.”

Hobson: Well doo you think that that’s where we’re headed — that the euro will just go away and these countries will go back to their currencies?

Low:I suspect we’ll still have a euro — the question is, who’s going to be in it. The way it boils down, you’re either going to have a devaluation of some kind involving Germany, or you’ll have one that takes place by peripheral countries pulling out and devaluing — that’s the argument they’re having. In the meantime, it’s noteworthy that the banks that trade for an exchange are beginning to prepare for the eventuality of the breakup of the euro. So that’s a pretty significant change that began just this week.

Hobson: How significant is it for the United States?

Low:That’s the big question, obviously, for us. I have to tell you there aren’t very many economists who agree on this, but I don’t think it’s going to be a huge deal. To put it in numbers, we only export about 1.7 percent of GDP to Europe. What that means is, they could have a massive recession, our exports could be down 20 percent, and it would only cut a quarter point off of growth. So, trouble’s not coming from there. What we have to worry about is contagion through the banks.

Hobson: Chris Low, chief economist with FTN Financial, thanks as always.

Low:Thank you.

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