The world may be about to witness a US recession next year, brought about by a collapse in house prices. Such a recession would almost certainly lead to a fall in the US current account deficit and a further possible significant decline in the dollar’s real exchange rate.

This would then bring about a much-predicted adjustment all over the world, although nobody sane would dare forecast the dollar’s exchange rate this time next year.

This side of the Atlantic there are two schools of thought as to how the dollar’s situation would impact on the eurozone.

The pessimists fear that a sharp and sudden adjustment in the US current deficit would hit the eurozone harder than other regions, leading to a sudden collapse in European exports to the US. The optimists point out that trade exposure to the US is relatively small – eurozone exports to the US account for only about four per cent of GDP.

According to a recent study by two academics – Philip Lane from Trinity College in Dublin and Gian Maria Milesi-Ferretti from the International Monetary Fund – a sudden adjustment in the US current account, accompanied by an unexpected 20 per cent dollar depreciation, would lead to a deterioration in the net asset position of European countries by 1.5 to 3 per cent of GDP.

Interestingly, the countries said to be worst affected would be The Netherlands, Denmark, Sweden, Norway, the UK and Switzerland – none of which, save The Netherlands, are eurozone members.

The effects of a sudden adjustment shock and a sharp fall in the dollar would probably end the eurozone’s current mini-boom, but it appears, from this study, that eurozone membership may protect some countries from the worst. Global investors may even pull out of non-eurozone countries, especially those with high current account deficits.

The euro-convergence report, a regular report published by the European Commission, last week gave a rather encouraging signal to Malta’s ambitions to join eurozone in 13 months’ time. Although it said Malta is still behind in the deficit, debt and inflation criteria, the Commission expects Malta to make the euro-entry criteria by May. And a Commission spokesman was even quoted as saying “Malta is well on the road though risks still exist.”

One of the main risks indicated in the Commission’s report regards inflation. The 12-month average inflation in Malta has been above the reference value since last May. At the moment, Malta does not fulfil this criterion, the report said, but the figure is likely to return to a position close to the reference value in the coming months.

The report also confirmed there has been a significant improvement in the government’s budgetary position with Malta expected to have a structural deficit of under three per cent of GDP for the first time in 18 years. According to the Commission, this should lead it to terminate its excessive deficit procedure against Malta by May, when Malta is expected to ask for eurozone entry.

The gathering clouds and the benefits of being inside the eurozone if and when the storm breaks should make it all the more impelling and urgent to join the eurozone by making the criteria by May.