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They have improved. Whether the euro will continue to drop is unclear. There are good reasons for the euro to fall, but there are good reasons for the dollar to fall, so its something of a race downward for the two currencies. What would help is if the Asian currencies that have been held down artificially would rise to reflect the higher productivity and higher growth rates and increased wealth of those countries.

Its an easy answer to say that the euro zone would have hit these bumps sooner or later, but it is true. That said, it usually takes crises or shocks to expose these weaknesses.  And the lack of labor mobility is a big factor in why its difficult to have a single currency, since that would have the effect of forcing down relative wages in places with endemically lower productivity growth (or push them up in places with higher productivity grown). And the lower wages would then shift where the work is done at the margin, much the way floating currencies have the effect of evening out trade flows. These are the mechanisms by which complex economic systems equilibrate and self-regulate themselves in a useful fashion. But its not just free flow of labor that's important, although that's the most important factor. Freer flow of services and more consistent regulation across borders would also be a factor. Banking markets are also  still balkanized.

One of the reasons I suggested a VAT tax last week, in my deficit reduction column, was for just that reason -- that a VAT tax is rebated for exports. Other countries have payroll taxes, in many cases higher than ours. Other countries have corporate profit taxes, although our marginal rate tends to be higher (effective rate, not so much). So its not like there is a huge tax disadvantage to US exporters. But if we need new tax revenue -- and we surely do -- then a VAT is the one that is the most competitiveness friendly.

Anyone who calls me a Fed lover hasn't been reading my columns.

Thanks for your note.

    At this point, the Europeans have to do two things. They have to use their bailout money not simply to buy up or refinance sovereign bonds at par -- and in effect bail out private investors -- but rather as pot sweeteners in debt restructuring plans that require private investors to take a haircut. The markets won't like that idea, of course, and it will in the short term raise the borrowing costs of all European countries until the market herd calms down and learns to discern the good risks from the bad risks. But it is important to do this so market discipline is strengthened and moral hazard is avoided. The only other alternative is to have the EU control national spending and taxes, which is politically unacceptable to everyone. The amount of actual subsidy involved in these restructurings need not be anywhere near $1 trillion, but it is probably necessary to get the kind of voluntary participation from the outstanding bondholders necessary to avoid and out-and-out default.

    The second thing that needs to happen is that Europe has to shore up its banks with some form of TARP program -- big capital infusions on semi-onerous terms that require shareholders to be serious dilution in exchange for the government investment. This will be necessary because of the haircuts banks will take on those restructured Greek and Portuguese bonds that will lower their already inadequate capital. So governments need to build a fire line around the banks.

    Finally, there may need to be a mechanism established for a country to leave the euro. Lots of people I have spoken with think that once a country defaults or restructures, this is the logical course, since they would have lost the whole reason for being in the euro which still be saddled with all the downside inflexibility. I'm not sure about that, because there are other benefits as well in terms of the advantages of easier commercial relationships that the euro provides. But it is probably not a bad idea to begin thinking of how such an exit might be structured. 

What the flash traders do has nothing to do with investment, as you and I understand that word. It's about trading, or gambling. Which is why its not that socially or economically useful.

I wouldn't worry too much about it -- its probably not going to make a big difference at this point either way. But the safe thing would be to buy about half the euros you plan to spend now, and let the other half float up or down.

There will be another slowdown in the US and global economy that begins in the second half. It won't be as bad as the recession, and it may not even get into negative growth territory. But I've been saying for a long time that a double dip is the likely scenario.

By collapse, I presume you mean a precipitous run against the currency, which could be very bad, because once these things get going they really overshoot on the way down. So it is always a good idea for governments to try to avoid that by providing liquidity. My point, however, is that there is still an underlying solvency problem here, as well as a structural problem with the euro market, and those have to be addressed and they will involve unavoidable pain. And while there will always be Keynesians who argue that you can grow your way out of those problems so that they can be solved without anyone really noticing (because they are paid for, in effect, with foregone growth), I disagree. The outstanding tab is now too big for that, both in Europe and in the US.  Or put another way, we went into this one with so much debt already on the books that the usual Keynesian medicine of taking on more debt isn't going to be possible.

I don't think you're reading that right. Germany IS the euro. It will be easier for it to kick the periphery countries out than for Germany to leave the euro.

And sometimes you're right about that. In this case, the question is how fast the adjustment comes and whether things are "good" for the US in the short run or the longer run. As a general rule, if the value of your currency rises, that's a good thing, but it gets complicated if you are running large trade deficits. In the short run, a stronger dollar means that all those things we import will be cheaper. But in the long run, it means it will be even harder to balance the trade flows, which at the moment require us to take on lots of debt because we import more than we export. So you can see why it gets a bit complicated. My view reflects the long-run one -- that we need to get the system back into balance and that will require a lower value for the dollar against most currencies. 

The ban is on "naked" short selling, which is selling something short that you don't, in fact, own or control. And since it means that an infinite number of people can speculate in a security for which, in the real world, there is only a limited supply, its a very distortive market and should be banned -- not just temporarily, but permanently. We do that here in the US and have managed to run a pretty good economy without naked short selling of stocks. Unfortunately, we haven't extended that to derivative instruments, which needs to be done.

     And, by the way, naked shorts are exacerbating the situation now. They didn't cause it, I admit. And there is an underlying solvency problem that needs to be dealt with. But that doesn't mean that speculative trading isn't making a bad situation worse than it needs to be. Your logic on that is simply faulty.

That's a fair point -- Germany cannot continue to have an economy based on the proposition that it will always export a lot more than it imports. And that has been true not only with countries outside the euro zone, but even more so with countries inside of it.  With the single currency, its export companies have been a big beneficiary of this imbalance, just as Greek consumers have been. It is analogous to the situation with the US and China, where Chinese export companies and American consumers have become reliant on a large and unsustainable trade deficit.

Let's not get ahead of ourselves, shall we?

You have articulated the Keynesian solution -- use borrowed money to grow your way out of the problem. It works in the short run, as we have discovered in the last year. But when you start out already deeply in debt at the height of the good times, you can run out of running room because the ease and cost of that borrowing is not a given, particularly when you are relying on global savings to finance it. 

Not yet, but I will now.

In principle, but not in practice. Lots of licensing and work permit red tape. Also, in Europe people just don't do it the way they do in the US, moving from one region to another. People are very rooted, which makes labor markets not very flexible and efficient.

China has the inverse problems to the US and that has resulted in lots of bubbles in their country -- housing bubble, stock bubble, etc. They are trying to cool it down now, and because theirs is a managed economy, they may be able to pull it off without some sort of crash. But there are certainly systemic risks there that should not be overlooked. That said, they do have running room in two important areas that would allow them to grow their way out of their situation. One is that they still have lots of underemployed workers who could become much more productive and continue to generate very fast economic growth. And second, they have lots of savings built up and not much debt, net, as a country.

Actually, if somebody borrows a stock to sell it short, then that's not naked short selling. That's just short selling. Naked short selling is when you don't even bother to borrow it.