Tags: Greece | eurozone | ECB | Germany

Something Might Give in the Eurozone in 2015

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Tuesday, 06 Jan 2015 09:27 AM Current | Bio | Archive

The first full trading day of the new year started with a bang, with many markets in the red all over the globe.

Because of political uncertainty about Greece, the euro fell through the $1.20 level, approximately 13.5 percent lower than where it stood a year ago, with practically no resistance. Because of that move down, many are already talking of parity of the euro with the dollar, which would represent another move down of about 16 percent.

I don't think it's an overstatement to say that for long-term investors, 2015 has started with too many questions about the eurozone and its single currency.

One could ask, how is it possible a small country like Greece, which represents only about 1.35 percent of the EU's GDP and where political uncertainty is not unusual, ignites once again, as it did in 2012, all these tremors in so many places all over the globe.

Of course, the Greek snap elections on Jan. 25 could bring us a nasty second edition of GREXIT, which stands for the potential withdrawal of Greece from the eurozone.

In case Greece should hit that monumental and historical "road block" as a consequence of the coming election results, I wouldn't be surprised if this event by itself could trigger a tipping point in broad-based markets with "risk off" once again becoming the dominating attitude among investors.

For now, it would be wise to wait for making any investment decision until the results of the Greek elections are finally known.

That said, it remains crystal clear we have an extremely complicated situation on our hands with political Germany, under the leadership of Chancellor Merkel and her Finance Minister Schaeuble, and the Greek coalition of the radical left, under leadership of Tsipras, which until now leads in the polls, are both uncompromising on the existing Greek bailout terms, which haven taken years and a fortune to build.

Nevertheless, when we take for once a somewhat optimistic approach on the subject, we cannot exclude, in case Syriza wins and it would be able to form a workable government, that today's hardnosed rhetoric probably belies a mutual understanding of the internecine forces at play, which ultimately would favor a hard-fought compromise.

Similarly, European Central Bank (ECB) President Mario Draghi appears fully prepared to finally introduce quantitative easing (QE) that would include sovereign bond buying in the face of the Bundesbank's opposition, which implies its potential submission to Germany's Constitutional Court for judicial review. Judicially spoken, that's not all as the European Court of Justice is expected on Jan. 14 to give a preliminary assessment on the subject and for which a final ruling is expected somewhere in mid-2015 and for that matter this is important because this could still have big implications for how the ECB finally approaches QE. No, judicially spoken, the ECB's QE is not as operational yet as Draghi wants us to believe.

We all know compromises avert crises, but then we have here with the eurozone that unavoidable question that arises about what if any form of compromise would achieve if it precluded fundamental change of one sort or another. After all, the status quo of budget restraint and inadequate monetary infusion in the eurozone have been the major causes of stagnant growth and chronically high unemployment, which unsurprisingly have, in turn, provoked the rise of all these new euro-skeptic parities that have brought Greece as well as other countries like Spain, Italy, France, etc. to the dire situation they have to face today.

If the eurozone is once again back on its usual track of more of "the same again" as we have seen so many times in the past, Greece could entail in many countries a continued shift of political support away from the center. In case that happens, this would represent the biggest longer-term risk hanging over the eurozone, which all long-term investors should better not overlook.

Wherever I look in the eurozone, I get that something like an uneasy feeling that one way or another, something might give in the eurozone in 2015, which includes the euro, but that won't be all. The big problem is that a new upheaval in the eurozone is a recognized systemic risk for the rest of the world, the U.S. included.

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HansParisis
The first full trading day of the new year started with a bang, with many markets in the red all over the globe.
Greece, eurozone, ECB, Germany
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2015-27-06
Tuesday, 06 Jan 2015 09:27 AM
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