Lack of Political Unity Will Continue to Pressure the Euro

Monday, 08 Mar 2010 02:40 PM

By Sean Hyman

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The euro zone has been dealing with the Greek debt problem for months and the jury is still out.

Some say an IMF bailout will be required. Others say that those in the euro zone will bail them out. (That’s what I’ve been saying is likely to happen).

Still others are now proposing that an EMF (European Monetary Fund) be formed. This would be similar to the IMF (International Monetary Fund) that we have today.

Honestly, if the last one were to happen, it would likely have to be formed later and help with future bailouts, but not this one.

However, the mixed signals continue to pour in. On Sunday, French President Sarkozy said that the euro region is ready to rescue Greece should the government struggle to fund its budget deficit.

He was very adamant about this. He said that, “While Greece doesn’t need assistance right now, we have measures…we are ready…we are determined.”

So what’s missing? The support from others in the euro zone that backs up what the French president says.

For instance, German Chancellor Merkel met with the Greek Prime Minister as recently as Friday and she did not say what Sarkozy said. In fact, Merkel and her team have made statements like, “We’re not going to sign a blank check for Greece.” (That sounds pretty clear to me).

So, right now, these guys are not on the same page and speaking with one voice. They are all contradicting each other.

Sarkozy wants to use the strong language to scare off the short sellers of the euro since he referred to the euro as being under an “attack by speculators” in his latest speech.

However, Merkel (which represents the larger of the two economies) isn’t on board.

This is why I agree with former Federal Reserve Chairman Paul Volcker when he said in a recent interview that “there is a structural crack” (referring to the lack of a political union to back up the European Central Bank).

Therefore, all of this talk of aid from France and the talk of no aid (so far) from Germany and the talk of creating an EMF fund, etc., will keep the confidence away from the euro until these officials can get on the same page and “sing with one voice.”

Once that finally happens, then you might see the downtrend turn around in the euro. However, we’re a long way from that point right now.
In fact, it could be until May or after that before we even find out what these officials are going to do. Sarkozy seemed to imply that they could make it on their own at least until May.

So, we really probably won’t know anything concrete for another couple of months or so. That alone will keep the pressure on the euro to the downside.

Could we have an upward “bear market rally” sometime soon in the euro?

Absolutely. But will the main trend likely remain downward for the months to come. Absolutely.

And by the way, if stocks start to sell-off heavily in the mean time, then this alone could extend the fall of the euro some more (Greek problems or not).

That’s why I see this euro downtrend likely lasting six to 12 more months at least.

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