Saturday, May 15, 2010

The Euro

Reports have it that President Sarkozy threatened to pull France out of the euro if other eurozone countries didn't agree to the big bailout found (h/t Charles Butler). Did he make this threat? Very likely. It fits his style. But was he taken seriously by the Germans? Very likely not. Germany was moved by its own judgment of the increasingly untenable situation. As James Carville once said, he would like to be reincarnated as the bond market, because that's where the power is. The prospect of sovereign default is serious; the prospect of disintegration of the eurozone would be cataclysmic. The Europeans seem to be banking for the moment on the prospect of a successful bluff, but yesterday's rout suggests that the bluff could be called sooner than expected. And then we will see what we will see. The economic crisis seems to be moving rapidly into a dangerous second phase, where national coordination (as in the US) and regional coordination (as in Europe) will no longer be enough. A plan for global rebalancing is needed, and it is not yet clear where such a plan will come from or how it can be implemented politically in national polities that have become increasingly restive and volatile.

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