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New REAL-TIME Financial Blog Post ( PART 1 of 2 ) SOVEREIGN DEBT … Global Financial Markets and the European Union


Germany is the Economic Engine of the EU. There is much concern in global financial markets regarding sovereign debt in Greece and to a lesser extent, Spain and Portugal. The current FUNDAMENTAL problem facing the EU is that the individual countries are somewhat dependent on one another in good times and even more interdependent during difficult economic times. This needs to change …. and fast. But how?

The EU needs fiscal reform with the International Monetary Fund as a partner, acting as a  ” deal-broker ” ( with behind the scenes input by Germany, the EU and European Central Bank ) in order to attempt to bypass nationalism and other political issues in the EU. A temporary mechanism of some sort needs to be put in place as well, to stabilize the current EU sovereign debt crisis to stop any potential runs on the banks. Institutional changes in th EU will be needed at some point as well. Unfortunately, EU members do not have the option of currency fluctuation policies for their individual countries. The single currency of the EU from this perspective, during difficult economic times, does not help in regards to economic flexibility.

The short-term GDP forecasts for many EU countries do not look promising.There is also the current issue of the lack of trust  between EU countries, which is understandable. It’s important to realize that sovereign debt , political issues and financial issues are all related here.  The member countries of the EU have diverging economic situations, while EU politicians and policy makers are trying to converge and manage this situation. This is exactly why the IMF is needed as a ” deal – broker “, to help get some INITIAL things done …. and fast. A proposed European Monetary Fund for the EU is a good idea for the future, but not practical for dealing with the initial short-term issues that need to be addressed.

Bringing in the IMF as a partner is this crisis may take some of the political pressure off of the EU. It could allow the EU to efficiently get more work done on a variety of  issues needing to be addressed in regards to the current sovereign debt crisis and it’s possible implications. It would allow the EU to  pick and choose where and when to use its ” political capital ” to push through related necessary reforms. I believe there is incentive for the IMF to partner with the EU in this crisis as well. With global financial markets increasingly intertwined, this is not just an EU crisis, it is a problem of global financial market volatility. This crisis could well serve, if successfully managed by all involved partners, as a  ” template ” for the IMF in regards to dealing with inevitable future regional and global financial issues and crises.

What are the current options and opportunities for the EU and its members to manage this crisis ?

Part 2  ( of 2 ) of this article will be posted this Monday 5-10-10.

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About Neven's Blog

My blog focuses on FINANCIAL MARKET ANALYSIS & INSIGHT from a macro as well as a micro - level point of view. The information is straight forward, honest, simplifies complex matters, questions some oversimplified matters, all while being as easy as possible for readers to understand. I primarily focus on capital and currency markets by combining insights, analysis & ideas from the fields of finance, economics and geopolitics.

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