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Economic stability: The old world desperately needs a deal at the G20

Amid the threat of competitive devaluations, the US and the eurozone need help from the new emerging market powers.

As the European single currency swung between $1.30 and $1.20 last month, Euromoney toured banks whose currency strategists were publishing estimates of it going to $1.15 or lower. In private conversation, it’s soon obvious that many indeed expect the European currency to head for parity with the dollar or even fall through it, especially if the present single-currency bloc holds together, and any system of fiscal transfers between states – which Angela Merkel has so far denounced as an "irresponsible" model – does emerge.

With the US, the UK and the eurozone governments all in the same boat, struggling with high debts, fragile recovery and low growth, the threat of competitive devaluations hangs heavy in the air.

For now all the concerns over sovereign debt sustainability are focused on Europe. The US appears to have done its job. The economy is growing faster than the rate of interest on its debt; its banking system looks much healthier than 12 months ago and the treasury market is benefiting from a flight to quality, driving yields down.

But what if US exporters should struggle to cope with a debased European currency and US growth slows? If the price it has to pay on its debt starts to rise, the US itself could fall back into the same kind of debt trap now ensnaring the eurozone periphery.

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