Greek Tragedy

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Includes: DRR, ERO, EUFX, EUO, FXE, ULE, URR
by: Evans Osemwegie

Summary

Continuation of crisis in Greece has dangerous implications for the EU.

EU needs to embark on painful but necessary structural reforms.

It is time to liquidate euro assets and buy assets in companies like KKR and Blackstone Group.

We are currently viewing another installment of the Greek tragedy unfolding before our eyes in the Eurozone.

It is a very testing time in Europe at the moment because the EU is facing a number of challenges.

Firstly, the EU is seeking to work with a more assertive Russia on its eastern flank. Russia is seeking to impose itself more forcefully on the world stage in an attempt to secure what it believes is economic equality in global trade. This is what is behind Russia's attempts to sell its oil in other currencies but the dollar.

Europe is in a sensitive place because its largest supplier of natural gas is Russia and as a result, the Europeans are approaching Russia very tentatively. They understand that international obligations and standards must be met but they choose to focus on gentle backroom diplomacy and not robust public renouncement of Russia's actions.

Secondly, Europe is facing a social challenge as it seeks to integrate Muslims into the European community. This challenge has been there for years bubbling beneath the surface. Outsiders mistakenly believe that it is about the Muslims coming into Europe.

That is an erroneous conclusion, it is fundamentally a deep grievance with EU bureaucracy, which is seen by a sizeable majority of Europeans as inflexible, authoritarian, arrogant and dogmatic.

In many respects, the EU government machine is almost like a state within states. It is not concerned with individual concerns of its members but about the European project. The treaties that the member states signed up to requires them to do their utmost to primarily further the interest of the EU first and if some benefits accrue to their respective countries, this is only an incidental benefit.

The rationale behind this is that in doing so, the collective will be stronger than the parts. This is why harmonization rules have been ruthlessly enforced by the institutions of the EU in virtually every facet of European society where European rules have to be given primacy over national laws.

It is this frustration that is driving a wedge between countries and the EU. It is what is driving the Brexit because the citizens have this sense that there is a democratic deficit and their voices are not being heard.

This is particularly acute as growth is stalling within the EU, this immigration challenge simply became a rallying cry around which opponents of all stripes can gather and challenge the EU.

The third point is related to the second, which is Brexit. The election of Sadiq Khan as the new Mayor of London is a strong indication that the majority will vote to remain within the EU. While Britain will remain in the EU, this referendum will fundamentally change how citizens respond to the EU because they now know that whenever things start to look and feel a bit rough, they can opt to leave the EU.

The fourth point highlights this very well. This fourth point refers to Greece because we are seeing a shift in sentiment across Greece whereby when the crisis began, Greeks were still largely in favour of staying in the EU but since then many have changed because they have realized that as long as they are in the Eurozone, their destiny is not in their hands.

As such, we are seeing an increasing rise of nationalism that started in Greece but is spreading across the nations in Europe.

The recent proposal by the IMF to push Greece debt further into the long term would have been unthinkable a few years ago but there is a recognition within the IMF that beyond debt payment, thought has to be given to the concept of the long-term viability of Greece and the EU as a whole.

What we are seeing within the EU as a whole is a complete failure of the imagination. They have been so narrowly focused on their goals that they missed the bigger picture of bringing the citizens along with them.

If the current low growth environment continues and the expansion of the money supply carries on, we will begin to see citizens lose faith in the institutions and also the euro currency.

As a result, we will also see wholesale re-adoption of former currencies. We are seeing this more and more in places like Germany where a sizeable amount of the population is once again using the Deutschemark.

Despite the significant increases in money supply, household spending continues to fall, debt levels remain high, banks are continually reducing lending, manufacturing continues to fall, consumer confidence is almost at an all-time low and growth rates have stalled and refused to move higher.

There has always been an implicit agreement between the EU and its member states that they will give up their sovereignty as long as the EU and its institutions can deliver stable growth and a strong economy.

This has not been the case for at least the last five years and the longer this persists then the more member states will begin to agitate and vote with their feet.

As long as the cash kept flowing in terms of payments under the various EU schemes like CAP, regional development and various others, relationships stayed strong despite various indignities the member states thought they have suffered.

The central planners at the European Commission may not want to admit it publicly but they know the current state of affairs is not sustainable. Something will have to give. The EU will need to be reformed at a much more fundamental level and in all likelihood, it will need to operate in an entirely different manner.

What we are seeing is an institution at a crossroad, from the outside, it looks impressive but from the inside, there is significant political and financial instability in the system. It cannot continue to ignore the people, as it is not politically accountable.

For the EU to survive let alone thrive, it has to look inwards and make some dramatic changes to how it operates.

For that to happen, there will need to be some short and medium-term pain particularly as the ECB and the governments decide to privatize their debt in various ways.

They will need to do this because in its current state, this debt represents a significant drag on the European economy as a whole. We have a situation where liabilities are increasing with debt being taken on to pay more debt and all the while, the income necessary for investment and survival continues to shrink.

The conditions are currently very distorted because the ECB is currently buying large portions of the debt but I believe that within a year, the QE will be finished because there is mounting evidence that it is not working.

At this point, prices will begin to fall for both the fixed income and equities markets. At that time, it will be unavoidable for investors to lose money on European securities. I suggest investors begin to liquidate now that the European financial markets are on a high if they want to sell at the top.

Over the long term, I have great hopes for the EU particularly as its partnership with China blossoms and also as it liberalizes its trade laws so that it can more effectively engage with its commonwealth nations around the world, most of whom are the fastest growing nations in the world.

In conclusion, it is my belief that investors should begin to sell euro-denominated assets as well as assets located in the EU area especially until we see some tangible and credible long-term plans particularly within the Eurozone.

In the meantime, investors should put their money into companies like Blackstone Group (NYSE:BX) and KKR (NYSE:KKR) because they and companies like them that have great expertise in buying and restructuring assets will do very well in this market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.