The Risk Telescope
For the last two and a half years, the eurozone crisis has been mostly a regional affair. The great questions of the day revolved around:
(i) whether (and then when and under what conditions) fiscal union might occur;
(ii) which countries might be most likely to exit; and
(iii) what kind of financial resources Europe would be willing to devote to resolve its deepening crisis.
Part I of this publication (issued today) focuses on the political and economic dynamics in Europe. It analyzes the adequacy of the answers to those questions in the Euro Area Statement(s). It suggests that none of the answers addresses persistent imbalances inside the EU today, and that the answers announced in Brussels are far from solid. Expect more change as treaty negotiations and ratification processes drag on amid likely deteriorating economic conditions in 2012.
Round Two — the global phase — begins now as European leaders begin the process of assembling their donations to the IMF and negotiating the form and terms under which at least some of that funding might find its way back to support eurozone economies. This is the most dangerous phase, as national sovereign interests will collide among countries that share less in common with each other than the eurozone shared with the United Kingdom. Part II of this publication will be published in the coming week. It will analyze the likely global implications of EU developments in the four great debates of our day:
(i) Geo-economic rebalancing within the IMF;
(ii) Monetary Policy;
(iii) Financial Regulation Policy; and
(iv) Reserve Currency Politics.
Dramatically different and strong views about the appropriate approach will need to be resolved amid likely deteriorating global economic conditions during 2012. They will need to be resolved as global policymakers within the Financial Stability Forum finalize a range of regulatory reforms promised by the Group of Twenty over the last three years and as the following major countries conduct national elections: Finland; Greece; Russia; Switzerland; France; South Korea; Egypt; France; Mexico; Czech Republic; United States.
The outlook for increased political risk and financial volatility has just increased.
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