Barbara Zigah
September 12, 2011

According to the former head of the U.S. Federal Reserve Bank, Alan Greenspan, “the Euro is breaking down,” and in so doing is “creating very serious difficulties.”

The breakdown is due, in part, to the variations between and among the various Eurozone economies. He points out that certain of the Eurozone’s northern countries, such as Finland and Germany, are highly disciplined in financial and budgetary matters, whereas their southerly counterparts, such as Greece, have built up tremendous debt burdens because they are primarily a consumption-oriented economy.

He questions the wisdom of a 17-member block of such diversity and believes that, in its present form, it “cannot go on.” “This,” he says, is the “lull before the storm.” It is also because of the integration of the worlds’ economies (and with 20% of all U.S. exports destined for the Eurozone), the fiscal crisis there matters.

And, he says, that poses trouble for the Eurozone’s banking sector which has tremendous exposure to sovereign debt; he specifically cited Greece as a country which is close to default. He pointed out that previously, Eurozone sovereign debt had been considered “ideal” collateral, now it’s on the verge of highly questionable.

He further commented during the question and answer portion of a symposium held in Washington, D.C. yesterday that the potentiality of a Euro break-up also poses trouble for the U.S. economy, which can’t recover with that degree of uncertainty. He noted that that uncertainty is restraining spending by consumers and hiring and investment by U.S. companies. While he doesn’t believe a U.S. recession is imminent, neither is he writing off that possibility.

In spite of earlier news of eroding business sentiment in Germany, the EUR/USD pair is trading higher at 1.4460 and eToro trader sentiment is predominantly bearish, with 47 sellers to 5 buyers.

Copyright 2011 eToro Blog

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