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Three trilemmas provide insight into the deeper problems with which Europe is struggling and which determine the prospects for European economic growth, government bonds and the euro, among other things.
Central banks are grappling with excessive inflation and a potential banking crisis. The first requires higher interest rates, the second lower rates. The banking problems do lead to less lending and less economic growth. This pushes down wage increases and inflation. So, does the unrest in the financial sector do the inflation job for central banks?
So far, the euro seems to be benefiting from the banking problems in the U.S. and Switzerland, but this could suddenly change if concerns about Deutsche Bank increase further. Lending will then come under further downward pressure and bring a recession closer, benefitting safe haven currencies such as the dollar, yen and Swiss franc.
Preventing a banking crisis is the top priority for central banks while lowering inflation has moved to second place. In first instance, this is negative for EUR/USD...