The Columbia Business School-professor, makes the arguments in an updated edition of his book on the credit crunch, Freefall. In the new material, exclusively extracted in the Sunday Telegraph, he reveals his fears.
“The different needs of countries with high trade surpluses, particularly Germany, and those running deficits such as Ireland, Portugal and Greece, meant that the single currency was under intense pressure and may not survive. He suggests that one way to save the euro would be for Germany to leave the eurozone, so allowing the currency to devalue and help struggling countries with exports.
“Countries that share a currency have a fixed exchange rate with each other and thereby give up an important tool of adjustment,as long as there were no shocks, the euro would do fine. The test would come when one or more of the countries faced a downturn.”
“Eurobulls would say it that the stress tests gave the banking system a clean bill of health. Perhaps. It also seems likely that having once once stood at the edge of the abyss, we now now what Euro leaders/ECB will do (perform a bailout). That theory is not airtight, since it would seem reasonable to counter-argue that if the market were totally under the spell of moral hazard, then the PIIG bond yields wouldn’t be blowing out.
Maybe. But it’s clear that while the freakout is coming back to Greek and Irish debt, the contagion fears appear minimal.”
Greek debt via PragCap.
Yet, Deutshe Bank say: No risk of a recession just yet:
Wall Street marks best month in a year in July – Dow added 7.1 %, the S&P 500 rose 6.9 % and Nasdaq gained 6.9 %. Stocks rally as worries over Europe ease; dollar, gold fall.