Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.
The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.
As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.
That Britain is now embarking on its own round of budget cuts will only make matters worse, adding up to one more important actor trying to consume less and export more courtesy of a devaluing currency.
Perhaps the best outcome is rising trade and currency tensions between the United States and China, while at worst this could set the stage for broader conflicts and a round of tit-for-tat tariffs to match similar currency devaluations.
