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Can the U.S Economy "de-couple" from the Eurozone Debt Crisis?

Economics / US Economy Jul 02, 2012 - 07:12 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: As the Eurozone teeters on the edge of a breakup, it begs the question: Can the U.S economy "de-couple" from the Eurozone debt crisis?

Ultimately, the answer comes down to fate of the euro. It's the linchpin to everything.


From the point of view of one who has travelled fairly frequently in the Eurozone I can tell you I find the euro very convenient indeed.

In my London merchant banking days, when I used to go on marketing trips around continental Europe, I found that while the excellent European train service was a pleasure to use, the proliferation of local currencies made travelling a pain.

There was nothing more annoying than to be on a long-distance train that had just crossed the border from Belgium to Germany at Aachen, only to discover that I could not enjoy the excellent Deutsche Bundesbahn bockwürst and fine local beer because I had only sterling and Belgian francs in my wallet, but no deutschemarks!

The other problem was that after a long trip I ended up with my wallet stuffed with small amounts of ten different currencies, none of which could be changed back into anything useful because the bank charges ate up their value.

In southern Europe, local exchange controls were a pain too.

Walking through Madrid airport with $25,000 of legitimately earned pesetas in bills which could not be transferred to Britain through the banking system was far too exciting for my liking.

From a British merchant banker's point of view, it was thus very convenient when all the local foreigners converted to the same currency, rather than lots of different ones.

After that, you needed only two compartments in your wallet: one for British money and the other for foreign money. Then you could travel all over Europe without worrying about changing currencies.

It was a very 19th century feeling, almost as good as being back on the gold standard!

Everything Rides on the Fate of the Euro
However, if only Greece leaves the euro, not much will change. Trust me, you don't want to take the train all the way across Europe to Greece!

If that's the case and the other Eurozone countries remain part of the euro, they will probably redouble their efforts to sort out their national budgets and banking systems to make it work.

Euros will remain freely transferable between the other Eurozone countries and no great recession will likely ensue - Germany, Finland and the other northern Eurozone countries will grow fairly rapidly, balancing the sluggish south.

The problem arises if the Eurozone breaks up altogether, with all of its members resuming their former currencies, or if one of its major members such as Spain or Italy leaves the euro.

In that case, all the advantages of the common currency for intra-Eurozone trade would disappear. It would be like putting a 1-2% tax on trade between Eurozone members and the countries that had left.

The problem would become even worse if the countries that left the euro re-imposed exchange controls to limit the outflow of funds from their new currencies.

That's fairly unlikely. But Italy in particular, which has a tradition of capital flight across the Alps, might find it could not control the new lira's exchange rate without doing this.

In that case, the additional tax on trade with the exchange control countries is more like 5-10%, because some transactions would be done in cash, while others would require immense form filling with the exchange control authorities.

The most extreme (and unlikely) stage in a euro breakup would arise if the countries leaving the euro ended with such bad relationships with their neighbors that they imposed tariffs and other trade barriers on trade with those neighbors.

That happened after 1918 in the countries that had comprised the Austro-Hungarian Empire. As a consequence, the inter-war period for Austria-Hungary successor states (Austria, Hungary, Czechoslovakia and Yugoslavia, plus parts of Poland, Romania and Ukraine) was miserable, with living standards for those countries' inhabitants far below those they had enjoyed before 1914.

The bottom line is that a simple secession of a few countries from the euro will have little effect on world trade and on the U.S. economy, although the effects on those countries themselves might be severe.

Only if the euro breaks up altogether would the disruption be sufficient to affect the U.S.-- especially if countries re-impose exchange controls or tariff barriers.

Short of a full euro break-up, however, we can say that the U.S. economy is effectively already decoupled from Europe.

Source :http://moneymorning.com/2012/07/02/can-the-u-s-economy-de-couple-from-the-eurozone-debt-crisis/

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