Euro's Pain May Be Dollar's Gain - For Now

Howard Gold MarketWatch November 21, 2011

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Nov. 21, 2011, 12:01 a.m. EST

By Howard Gold

NEW YORK (MarketWatch) "” The crisis in the euro zone has entered a new phase.

Unelected "technocratic" governments are taking power in Greece and Italy. Their remit: pass tough reforms politicians wouldn't propose and voters wouldn't accept in normal times. Shock doctrine, here we come.

Bond investors usually love this stuff, but now they're barely smiling. Yields on Italian 10-year notes fell briefly below the dangerous 7% threshold that created a panic last week, but then crept back up there Tuesday.

/quotes/zigman/4867933/sampled EURUSD 1.3495, -0.0017, -0.1221% The euro has held up

Meanwhile, the bond vigilantes have driven yields on Spanish bonds above 6%. Wasn't Spain supposed to be out of the woods? And yields on bonds issued by France, Austria, and even the rock-solid Netherlands have moved higher.

Yet, through it all, the euro has held steady at around $1.35 "” midway between its 52-week high near $1.50 and its 2010 low below $1.20. You'd think that with all the talk of the single currency unraveling, our own greenback would have gained more.

And it will, when the crisis worsens. The U.S. has some big problems, but watching Europe makes me grateful for ours.

If we can stay out of recession and make at least some dent in our own fiscal morass"” watch Congress's super committee for any hints "” the dollar's decline will slow and we may enjoy reserve currency status a bit longer. Further in the future, though, I think we'll have to share the stage with others. Read Howard's take on how Congress is playing chicken with debt again in The Independent Agenda.

So does Barry Eichengreen, an economics and political science professor at UC-Berkeley and author of "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System," which was a finalist for the FT/Goldman Sachs Business Book of the Year Award for 2011.

Click to Play $(function () { $("#video_4DA359F2-6BE3-4EBC-BAEC-C8B31DFCD48B").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('4DA359F2-6BE3-4EBC-BAEC-C8B31DFCD48B', 'video_4DA359F2-6BE3-4EBC-BAEC-C8B31DFCD48B', '287', '162'); }); }); U.S. week ahead: H-P, Deere earnings

Investors' eyes next week will be on European news, including Spain's parliamentary election on Sunday, followed by U.S. data releases, and earnings from Hewlett-Packard and Deere & Co, MarketWatch's Nicole Hong reports on Markets Hub. Photo: AP.

In an interview, Eichengreen told me there are no real alternatives to the U.S. dollar for now. And we need to get through the euro crisis before we can even think about a global role for the single currency again.

He said the current crisis has moved far beyond the worries about Greece we've had all summer and fall. "The fate on the euro doesn't rest on what happens in Greece," he told me. Greece comprises 2.5% of the euro zone's gross domestic product; Italy represents almost 17%, and that is where it will sink or swim.

He said European officials are "in a game of chicken with the Italian government." He compared it to mutually assured destruction, the Cold War doctrine that both the U.S. and the Soviet Union could destroy each other several times over, and that was an incentive not to start a war in the first place.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, as well as eurocrats in Brussels, are pushing Italy's new government to ram through draconian reforms to cut debt, increase labor "flexibility," and raise the retirement age.

Italian households actually are pretty wealthy, but government debt is a shocking 120% of GDP, and growth in both productivity and GDP has been minuscule for years.

The new prime minister, Mario Monti, is a former economics professor and university president who also served on the European Commission, which makes folks in Brussels comfortable. He replaces the despised Silvio Berlusconi, a notorious lecher and an embarrassing buffoon.

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And it will, when the crisis worsens. The U.S. has some big problems, but watching Europe makes me grateful for ours.

Italian households actually are pretty wealthy, but government debt is a shocking 120% of GDP, and growth in both productivity and GDP has been minuscule for years.

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Euro's Pain May Be Dollar's Gain - For Now

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