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Is the Euro Moving towards an Endgame?

September 12, 2011

In the past few days, the stability of the euro has again become a hot topic in Europe.  There is now concern that Germany will no longer support a bailout of Greece and that it will soon be time for an “orderly default.”  The result has been that stock markets across Europe and Asia have fallen, and now that markets are open in the US, they are following this trend, as the Dow Jones has dropped 115 so far.  As the chart below shows, the result has also been that the euro has dramatically declined against the dollar.  According to the European Central Bank, the euro was trading at €1 = $1.3656 today, which is the lowest level since mid-February.  This is a 5.2% fall in the last two weeks.

Another indication of the markets’ fear over economies in the Eurozone is the interest rate being charged on government 10-year bonds.  As the below figure shows, Greek rates have again skyrocketed.  The Greek rates fell in July, on the news that the EU had agreed to a new bailout, but since then interest rates have climbed by 33% to 20.6% on Friday.  In addition, Spanish and Italian rates have also begun to increase again, after a brief respite that was the result to austerity measures being introduced in their respective parliaments.

At the same time, German interest rates have continued to fall since the latest Greek bailout was announced in July, as investors have fled to its relative safety (chart below).  As a result, the European Debt Crisis appears to be taking a dramatic new turn, and the leaders of Europe (or at least Germany) might soon be forced to make the decision whether integrate further to save the euro or cast off its weakest economy.

In order to help K-12 teachers in the US learn more about the European Debt Crisis, the IU European Union Center is sponsoring a webinar on “The European Dept Crisis…and Its Implications for the US” on September 20 at 4:00PM.  For More information, please click here. 

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