Trust must be rebuilt. The euro crisis has not reached its climax yet. The U.S. dollar could rise and stocks fall.
E.U.: A turning point or a failure?
On Thursday and Friday, 27 European leaders gathered in Brussels (Belgium) for their last meeting of the year. A special attention was given to the German/French initiative for a revised structure of Europe. Some investors expected important decisions to be taken at the end of the week. In fact, amendments of some treaties require the approval of all 27 governments. Others saw the summit as a drop in the sea of the huge European straggle. Basically, it was considered a waste of time.
Despite some tension between Britain and the rest of the team, the result fell in between the two extremes. Those waiting for Europe to become a fiscal union might have been disappointed. However, for the first time in two years, important steps have been moved in the right direction of a fiscal treaty. The decision was almost unanimous. Great Britain decided to play solo, although heavily relying on Brussels subsidies for its farmers.
Trust must be rebuilt.
Here is a synthesis of the summit. First, structural deficits cannot be larger than 0.5% of the G.D.P. Countries that overcome the 3% of the G.D.P deficit limit will be penalized. Then, the EFSF will be effective as soon as possible. Finally, the ESM rescue mechanisms will be a reality by July 2012 without a banking license. Resources up to euro 200 billion will be provided to the I.M.F. In reality, some questions remain unanswered. Who will give the money to the I.M.F.? Who will coordinate the work? Trust between Europe and the markets must be rebuilt. The European crisis has not reached its apex yet.
Credibility is the key. The euro could decline to 1.28 and eventually 1.22 by the first part of 2012. Why? The continent is already in recession. The ratings of some European countries, including France (probably not Germany), could be downgraded. Greece might default in the first six months of 2012. Lastly, the E.C.B. is providing liquidity to its members. Nonetheless, it has stopped buying government debt (for now). With rates at 1.00%, quantitative easing could be an option next year. Eurobonds might be introduced, but only after reforms will be in place.
The U.S. is holding, but for how long?
Despite the current advantage, the U.S. dollar could capitulate under the huge deficit in the longer-term. Solutions are difficult to take in Washington D.C. Republicans and democrats, like two islands, are moving way from each other. As a result, workers are at risk of receiving about $ 800 less next year, if the Congress does not extend the U.S. payroll tax cut. The economy is moderately growing, while inflation has topped for now. Nevertheless, a breakout is expected, especially in the labour market.
Next year, exports could be milder. China's economy will possibly stay below 8%. The Chinese government was able to surf world crises very well. The economy grew more than 7% during the Asian meltdown of 1998 and the crush of 2009. What will happen in 2012 with housing fading and Europe going into recession? Bank reserve limits have been eased lately. Why? Inflation is declining, but remains above 4.00%. A hard landing of the Asian giant will have serious consequences elsewhere.
