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Opinion
Gary Shilling

Deflation Is About to Wallop Europe

Real gross domestic product growth in the euro area is only 0.9 percent annually, well below the 2.3 percent in the U.S. Does the euro really deserve to be strong against the greenback?
The days of euro strength may be numbered because of mushrooming fears of deflation. Photographer: Ralph Orlowski/Bloomberg
The days of euro strength may be numbered because of mushrooming fears of deflation. Photographer: Ralph Orlowski/Bloomberg

The euro has been defying gravity for years. Europe's Teutonic North and Club Med South were joined under one monetary policy. But the 18-member euro area has no common fiscal policy and probably never will, given its vast cultural and economic differences. This hardly makes the euro a safe-haven currency.

After dropping from 1.60 per U.S. dollar to 1.20 during the global recession, the euro has risen to 1.38. And that's despite Europe's follow-on recession, which began in the fourth quarter of 2011 and lasted six quarters. Real gross domestic product growth since then has averaged only 0.9 percent annually, well below the 2.3 percent in the U.S. Does the euro really deserve to be strong against the greenback?