I am skeptical as to the economic benefits of the Eurozone. In my view, the Euro has always been more of a political construct than an economic one. Nevertheless, the Euro has functioned quite well as a leading international currency in the decade since its formation. However, the present financial crisis is revealing tensions within the Eurozone, the consequences of which are not readily apparent.

The European Central Bank cut its benchmark rate 50 basis points (0.50%) to 2% because of weakness in the Eurozone. While a cut was widely anticipated, it was not known whether the ECB would cut 25 or 50 basis points. However, the cut of 50 basis points ended up confirming the prevailing view that the ECB is behind the curve. As a result, the Euro weakened against the Japanese Yen and the U.S. Dollar.

With the economy weakening significantly around the globe, the budgets of sovereign nations are coming under increased pressure. As a result S&P has put a number of countries under review for potential credit downgrades. However, now, the first actual cut is in: it is Greece.

Ambrose Evans-Pritchard has picked up on the decline in trade flows that many have highlighted in recent months. This time, he looks at European-Asian trade flows and sees some major problems.

The Ukraine-Russia row over natural gas has escalated to a new high. Now, state-owned Gazprom has completely cut off supplies to Europe through the Ukrainian transit route. It still remains unclear what the ultimate aim of the Russians are in bringing the issue to this critical state. Nevertheless, it is generally believed that Russia is making as much a political statement about NATO expansion, the disregard of Russia’s sphere of influence, and the dependency of the European Union on Russia for its energy needs. One should expect a political response from the EU shortly.

As an article in my links yesterday suggested, for many in the west, Russia’s behavior of late has lurched toward the unpredictable, volatile and aggressive. After Russia’s moves against Georgia in South Ossetia, wariness in the west has increased, sometimes bordering on hostility.

I have generally taken a more pro-Russian view of events, seeing the reactions by Russia as predictable responses to a Super Power provoked by repeated slights. That is neither here nor there as the latest controversy heats up, this time over natural gas.

I caught a good article in today’s Guardian about the British Pound. The question is: how weak will Sterling get? My answer is below 1-to-1 with the Euro. But before I tell you why, let me interject a blurb from the article.

Zero percent interest rates mean a weak currency. The U.S. Dollar is getting hammered. See these charts from the last day and a half of trading. Even the British Pound is cleaning up!

Angela Merkel, the German Chancellor has rebuked the United States for its easy money policies, suggesting it was kicking the can down the road and setting up a greater problem later. It is high time the debate about monetary policy made it to the political arena.

Credit markets continue to return to less extreme levels. While we are nowhere near where we were before the onset of the Lehman-induced panic, we are well off the panic levels of the worst of the crisis.
The Times of London is reporting that Libor rates in Dollars, Sterling and Euros are all coming down [...]