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The Eurozone is in free-fall


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More proof that Britain was right to keep the £. The countries that have the Euro are grinding to a halt.

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Eurozone's growth 'is grinding to a halt'

Ambrose Evans-Pritchard, Telegraph 24/6/05

The eurozone is sliding towards a Japanese-style "liquidity trap" and may have trouble holding monetary union together unless the EU authorities take prompt action, according to a report yesterday by HSBC.

The bank warned that eurozone GDP growth was likely to "grind to a halt" as exports weaken in the second half. "The dangers of a liquidity trap are rising in the region," it said.

"Germany is perilously close to deflation. We believe it is only a question of time before there are generalised price falls in the country. This will in turn raise more questions about the rules governing EMU and the sustainability of the single currency itself."

The bank said the Netherlands and Italy were also in danger.

Italy was in "dire straits" after a "collapse" in productivity and negative growth for five out of the past nine quarters. "Italy has completely failed to adapt to the rigours of the fixed exchange rate," it said

HSBC forecast 1.1pc eurozone growth in 2005, but warned that the bloc may tip into recession as the global trade cycle turns down. Germany's exports to China are already falling.

The warnings come as fresh data showed a 3.9pc fall in Italian retail sales in April, the worst monthly drop since records began.

HSBC called on the European Central Bank to cut interest rates now from 2pc to 1.5pc before the downturn in the eurozone becomes unstoppable.

The dreaded term "liquidity trap" was used by economist John Maynard Keynes in the 1930s when traumatised consumers and investors refused to spend, pushing prices ever lower.

Deflation renders conventional monetary policy impotent as it is impossible to cut interest rates below zero (though there are other methods). Inflation-adjusted rates rise as the crisis deepens, causing mass bankruptcy.

Germany and Holland may now be slipping into this trap. Their core inflation is around 0.7pc, but on a downward glide path.

The ECB's one-size-fits-all interest rate, stuck at 2pc as the bank still struggles to cool property booms in Spain, Greece, Ireland, and parts of France, is effectively driving Germany - and Holland - deeper into slump.

The single interest rate and the Stability Pact mean that Germany, with among the lowest inflation and growth in the region, is faced with the highest real interest rate said the report.

Deflation is hard to stop once it becomes lodged in the system. Japan is now in its eight year of falling prices despite zero interest rates for much of the period.

Peter Wandesforde, HSBC's chief European economist, said the weaker euro had helped put off the day of reckoning.

"We're not looking at the doomsday scenario quite yet: but it is a question of when, not if," he said.


Edited by Blackleaf
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  • warden


  • Blackleaf


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Well who have they to blame for this mess,their leaders and polititions,and we know what hapens to people who fail ,they get the boot.

Who knows by kicking many of the old guard and realecting new faces with fresh ideas many of these countries an pick themselfs up and be a force to be recond with,but when you hear them talk they seem to be 20 years behind the times

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