When Standard & Poor’s downgraded Greece’s debtto junk status last week, stock markets around the world sold off on fears that the crisis could spread.
Despite the agreement over the weekend to aid Greece, stocks are down sharply again today on similar fears as other nations, especially Portugal and Spain, are also facing severe debt issues.
The whole situation also brings into question the strength of the euro currency, something I talked about recently with Axel Weber, head of Germany’s central bank, the Deutsche Bundesbank.
What he says is worth listening to for two reasons: First, Germany is the strongest economy in Europe and key to any fiscal policy there; and second, he is thought by many a likely candidate to succeed Jean-Claude Trichet as head of the European Central Bank.
There were questions when it was formed whether one currency could represent different economies facing different realities, and this is the first serious test it has faced. I asked Prof. Weber if it was in danger of collapsing.
“No, I think there is no such risk,” he answered.
“There are, of course, tensions in the fiscal policy frameworks of some European countries. But if you look at the perception of the euro in international financial markets, the euro is viewed as a strong currency. The single monetary policy for the euro area is a credible monetary policy. We have been able, for ten years, to deliver price stability just as the best members of the euro area.”(Click here to watch the full interview.)
Even with an aid package, we see from today’s market action that the debt crisis in Greece isn’t going to disappear completely. Some, such as NYU economist Nouriel Roubini, said previously that it wouldn’t work and that the impact will spread. And if there are further problems in Greece, the agreement spreads the risk throughout Europe at a time when that part of the world continues to struggle. Many multinational companies are putting less emphasis on Europe because growth is slower and the customers just aren’t there.
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