This crisis could grow worse in Europe due to the reluctance of eurozone authorities to adopt an easier monetary stance. According to Hugh Hendry, founding partner of Eclectica Asset Management, in a video interview on the Financial Times (23 january, 2009), the current ECB policy is a remake of the Gold Bloc dramatic mistake, following WWI, in its ill fated tentative to maintain overvalued currencies at their pre-war level. Due to divergent inflation rates among eurozone countries, a debt default is not impossible in some member countries, leading to a "break up of the euro". A return to equilibrium through relative monetary tightness, and thus deflation - rather than through exchange rate depreciation which is much easier and less contractionary - spells trouble in a period of recession.
Desmond Lachman of the American Entreprise Institute says about the same thing in his recent paper (January 9, Australian Financial Review): "Prolonged Recession Could Shake Euro to its Core".
A suivre...
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