Proof of Funds from A2Zservice.com defend against the euro's fall

Dennis Lachman, a professor in economics at Georgetown University and a resident fellow at the American Enterprise Institute for Public Policy Research, said at a conference on monetary policy and financial stability at the Reserve Bank on Thursday he has little doubt about this.

"The only question is how long the governments in the northern part of Europe can keep kicking the can forward by financing a trillion dollars here and a trillion dollars there to keep the party going for a little bit longer.

"We are talking about a currency arrangement that was flawed from the start."

Lachman said the default of Greece or Ireland by the closing of next year was another fact.

"The important thing is that we are not talking about problems only in Europe's periphery; we are talking about problems in the European banking system.

"Their inter-linkages with the European banking system makes this of concern. It is not only for the European economy, but what we have learned from the Lehman (Brothers) debacle and the sub-prime debacle is that these kinds of crises have a habit of being global in scope."

Lachman said at the end of 2009 the exposure of French banks to the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain,) was around 37% of France's gross domestic product. For Germany the exposure is 21% of GDP.

A write down of the debt of these countries would thus result in a shock for economies that haven't fully adjusted to the Lehman shock, he said.

A euro dilemma would go along with with the US economy either double-dipping or flirting with a double-dip, Lachman said.

"The US economy experienced the deepest recession in the post-war period and the recovery has been at a very anaemic rate. Fiscal stimulus from government has been providing support of about two full percentage points of GDP, so a lot of the growth was from of the fiscal stimulus package.

"As we go into 2011 the fiscal stimulus ... can turn into a fiscal drag of around 1.5 percentage points.

"Banks are also still in bad shape and they are not lending. (Federal Reserve chairman Ben) Bernanke can be printing all this money, but it is not being steered through the system."

Proof of Funds