Why the Euro May Be Doomed

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Market Drivers July 10, 2015

Deal looks doable – Eur moves above 1.1100
UK Trade Balance bit better
Nikkei -0.38% Europe -2.19%
Oil $53/bbl
Gold $1161/oz.

hope but
Europe and Asia:
AUD AU Home Loans -6.1% vs. -3.3%
GBP UK Trade -8.0B vs. -9.7B

North America:
CAD Employment 8:30

It’s been a decidedly more positive day for risk in the FX market as Greece finally made a proposal the the Eurogroup appears likely to accept. Greek officials working closely with their French colleagues put forth a more detailed plan that called for further austerity measures and sought at least a 3 year bailout program worth more than 50 Billion euros.

However, the deal is far from final and German Chancellor has adamantly refused to entertain any possibilities of debt restructuring – a key negotiating point that Greece believes it needs in order to resuscitate its moribund economy. Over the past 24 hours the pendulum has clearly swung in favor of the lenders as Greek officials facing a near collapse of their economy appear to have conceded most of the key points.

However, even if the Greek deal is done this weekend, keeping Greece within the euro for the time being, it does not address the key structural problems that will keep the country in a depression for the foreseeable future. If the long drawn out saga results in nothing but the current bailout deal it will have accomplished nothing of value as Greece will simply push its insolvency a few years into the future.

Perhaps the best thing that can be said about the wrenching debate over the past several months is that it finally laid bare the structural weaknesses of the European union and more importantly the untenable policies of its dominant member – Germany. While Ms. Merkel appears to have won the battle she may very well have lost the war for keeping the euro as a sustainable structure going forward.

Ms. Merkel’s inflexibility on the issue of fiscal transfers and debt forgiveness within the union have basically created a policy that will doom the euro much sooner than most analysts believe. Greece was simply a prelude to the next financial crisis within the union and if the same policies are applied to a larger economy within the Eurozone, the euro will fracture as a store of value.

So perhaps the silver lining to the still unresolved Greek saga is that European policymakers may finally begin to tackle the structural weakness of the current set up and may begin to create pan-european solutions to keep the monetary union in tact.

For now the market liked what they see and the prospect of a deal has lifted the EUR/USD by more than a full figure, but the currency remains vulnerable to any last minute glitches and more importantly to long term scepticism from investors.

Boris Schlossberg
Managing Director

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