(Update.) Thanks, Glenn, for the Instalanche! Let’s add this front page article in the Financial Times today, Tuesday, February 9, 2010, “Traders in Record Bet Against the Euro.”
(You might also want to see my more general discussion in a post above on the directions of the EU regarding the unstable position of currency union without political/fiscal union. Some people have raised some objections particularly to that post’s closing paragraphs regarding how the Obama administration views Western Europe – essentially losers in the globalized world, and no one worth paying attention to because anything of value that might have been learned from the internal European social democratic model has already been absorbed and priced into Obamism. But I think it’s right – and I think that is the conclusion that European leaders have been drawing about what, not just Obama, but his senior cadre of intellectuals and elites think about Europe.
That’s quite apart from thinking that the Obama administration has so thoroughly absorbed the European lesson that a massive internal democratic socialist welfare state means geopolitical decline, that Obama is not just a weak leader in foreign policy – personally weak, as Sarkozy clearly thinks – but structurally weak as well, meaning that the foreign policy weakness is built into the structure of domestic policy shifts to a massive social democratic state. These European leaders know better than anyone on the planet how the shift to their domestic social model implies geopolitical decline. So they have no doubt as to where Obama is taking the US in foreign affairs. As I said in the later post, we Atlanticists should have read Aron more recently.)
From the FT:
Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis … The build-up in net short positions represents more than 40,000 contracts traded against the euro, equivalent to $7.6bn. It suggests investors are losing confidence in the single currency’s ability to withstand any contagion from Greece’s budget problems to other European countries.
The WSJ’s ‘Heard on the Street’ has an interesting item today comparing California and Greece from the standpoint of the bond markets. Bottom line is that California fares far better than Greece in investors’ minds. It’s a question, of course, how much of that is attributable to how investors see the underlying economies of each place and, instead, how investors are pricing the sugar daddi, er, the US government and EU-Eurozone institutions that might be called upon to offer a bailout. But in terms of spreads, take a look at this chart from the story:
It is important to bear in mind that these kind of spreads can turn very quickly – indicators of short term sentiment concerning something that is basically a political and so, these days at least, a volatile issue. These spreads for California could turn tomorrow, depending upon how investors read signals from Washington DC, or several other places. Thus the WSJ article notes with respect to Greece’s dire situation:
Adoption of the euro, by removing the threat of currency fluctuations, encouraged yield-hungry investors to bid up Greek bonds. Leverage allowed Greece to run big current account deficits, despite low productivity growth. The result, once the credit bubble burst, is today’s crisis. There is no easy European fix.
Greece has two main options to restore competitiveness and narrow its current-account deficit: Withdraw from the euro and devalue, or win large and ongoing transfers from European states with surpluses like Germany.
Leaving the euro looks unpalatable. Bilateral transfers to Greece, even dressed up as loans, would be hard to sell to German voters. And such aid wouldn’t address Greece’s lack of competitiveness. Only grinding domestic deflation, with the risk of social unrest, or withdrawal from the euro could do that.
The imposition of EU “discipline” on Greece in return for transfers would represent creeping political union of an undesirable kind – one forced by Germany for fiscal reasons rather than one negotiated by member states. But Greece’s saving grace may be a default there would likely drag down Spain and Portugal. Such a risk will concentrate minds in Europe to find a solution, even if a bailout would not answer the question of the euro’s suitability for uncompetitive Mediterranean economies.
I’ll take up separately the question of California. Likewise the question of political economy in the Eurozone – currency union without political or fiscal union? But the article essentially thinks that California is saved not by a better internal structural economy, but instead because of its place deep in the heart of its guarantor. California has better political hold-up. It’s got better positioning to be able to force the US as a whole to internalize its difficulties, in ways (according to the article) that Greece will likely not be able to do with German voters.
One last quote from the FT quoted in the update:
Thomas Stolper, economist at Goldman Sachs, said: “ Behind this intense focus on Greece obviously is the long-standing unresolved issue of how to enforce fiscal discipline in a currency union of sovereign states.”