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Future of the Euro Questioned

Concerns about the sovereign debt difficulties of Greece  has raised the market's awareness.  If this is a global problem, who is going to be in charge of the bail out?  As far as debtors go, Greece is a piker, but look at the problems that bail out is causing.  Give them €100B and they riot.  Raise the ante to €150B, and tell the Greek bureaucrats they must take a pay cut and they schedule a new riot.

As the government borrowing cost soared for Greece and started to work higher in Spain and Portugal, it was obvious more had to be done to defend the euro.  The division between the frugal northern Europeans and their spend thrift Mediterranean partners was great.  According to Spanish reports Sarkozy told Germany's Merkel that she had to get aboard the bailout plan or Sarkozy was going to cash in his euro's for French francs and go home.  This threat, along with pessimistic comments by euro doubters such as Paul Volcker, had made many question weather the euro will survive.  

Government needs to finance their bloated size and cost is not confined to just a few borders.  It is estimated that the Europeans need to borrow €2T in the next three years to retire maturing debt. The US Treasury will need to borrow $1.5T this year for ongoing operations.  There is real fear that the private sector, where job creation begins, will be crowded out, unable to borrow.  In this environment, market psychology counts for a lot more than economic reports.

Some of the causes of the euro problems have been anticipated and there may be no quick fixes.  Victor David Hanson published an article called The Other European Volcano in and said:

"Five years ago, the European Union’s account of itself resonated with end-of history triumphalism. In organic fashion, democratic socialism would spread eastward and southward, recivilizing the old Warsaw Pact and the Balkans through cradle-to-grave entitlements, state unionism, radical environmentalism, and utopian pacifism.".......however... " Few wanted to listen when it was pointed out — well before the Greek meltdown — that on key questions of demography and immigration, the future of the European Union was bleak. The very idea that, in historical terms, socialism, agnosticism, pacifism, and hedonism were not only interrelated and synergistic, but also suicidal for civilization, was considered crackpot. 

The wonder of the Greek implosion was not that it came so soon, but rather — given the pan-European phenomena of early retirement, declining populations, bloated public sectors, and militant unionism — that it took so long. In some sense, the dream of the European Union — a continental democratic socialism that offered a Western liberal antithesis to the United States — is now finished."

Strong words yes, but if you look at a monthly euro chart, a close under 1.24 is the lowest close since April 2006 so traders may have reached a collective epiphany.  Obviously we know the traders do not want the euro, but where do they want to put their money, and what about the central banker, where is he going to now put reserves?  Some questions to ponder for the weekend.

No charts or trades today.  Have a great weekend.


Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.

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