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Is the Euro Experiment Nearing its End?

Is the Euro Experiment Nearing its End? 
Ron DeLegge, Editor
November 4, 2011

For whatever its worth, here’s Europe’s very clear and very final bailout terms: You can definitely count Greece in – or maybe not.

Although this vague analysis pokes fun at the uncertainty of whether Greece will stay or leave the eurozone bloc, its accuracy rate is pure. How should traders be positioning their euro bets?

Contagion Continues  
Since the onslaught of the euro crisis in early 2010, ETFguide has said that Europe’s story is one of contagion. All along we’ve kept that view, despite the reams of analysis – especially the sort paid for and funded by Europe’s political elite -   that contradicted this view. The simple fact is that Europe cannot and will not escape the inertia of contagion.

Greece’s decision to stay within the eurozone bloc now boils down to a Dec. 4 vote by Greece’s citizens. (While Greece may think it can put the eurozone on hold until Dec. 4, I privately doubt the eurozone will wait that long.)

Interestingly, Greece’s own citizens offer a good case study in the psychotic tendencies of Homo sapiens.

On one hand, 7 in 10 Greeks favor staying in the eurozone bloc, yet those same folks passionately object to the fiscal requirements for Greece to remain within the monetary union. Put another way, they realize concessions are completely necessary, but they don’t want to make any. (Please note, these same psychotic tendencies are not limited to Greeks, but have also been observed in people from all nations.)

The “Other” Vote
Another quasi-vote, which is arguably more important than Greece’s Dec. 4 nonsense, was the message sent by members of the world’s 20 most powerful economies. The fact that leaders from the powerful G-20 alliance did not increase funding to the International Monetary Fund (IMF) to help Europe (NYSEArca: VGK) speaks volumes. Why throw good money after bad?

Alluding to this, French President Nicolas Sarkozy made it very clear who is bankrolling Greece’s financial debauchery – and for that matter the rest of Europe’s – when he said, “No French taxpayer money, no German taxpayer money.” At least Sarkozy isn’t shy about telling everyone who’s footing the bill. It always has been and always will be taxpayers.

Bigger Problems than Greece
While Greece continues to garner most of the news headlines, it’s actually Italy and Spain that are more crucial to the euro’s future. They have bigger economies and more is at stake.

One week after calling the euro a “strange currency,” Italian Prime Minister Silvio Berlusconi recognized his country’s importance – sort of. Berlusconi’s master plan was to cut $2.6 trillion in debt and to rekindle economic growth. Unfortunately, the plan failed on many levels. Not addressed in the blueprint was Italy’s overregulated labor market, nor its high taxes. Italy’s debt to GDP is 118.4%, according to Eurostat.

Not Learning from History
The eighth largest bankruptcy in U.S. history was brought to us this week by MF Global Holdings – a broker/dealer, which went broke. The firm was led by non-other than Jon Corzine, former co-CEO at Goldman Sachs and former governor of New Jersey. He had a beautiful resume, which was probably part of the problem. According to some accounts, Corzine had a thing for making risky bets – not just with his own money, but MF’s. As it turns out, Europe was the perfect match for Corzine’s daredevil streak.

At the end of October, MF Global held around $6.3 billion in sovereign debt from Belgium, Italy (NYSEArca: EWI), Ireland (NYSEArca: EIRL), Portugal, and Spain (NYSEArca: EWP). Apparently, Corzine’s crew was betting that a massive bailout of Europe’s troubled countries would turn MF’s bond gambles into gold. Unfortunately, dreamers like Corzine can’t see the market through their risk models. The bailout playbook that worked like a charm in U.S. markets (NYSEArca: SCHB) from 2009 up until now, is old hat. Europe is not the United States.

Trading the euro, intelligently
While the eurozone remains in a state of limbo, the trading strategy for the euro (NYSEArca: FXE) has never been more clear.

Each step of the way, Europe’s leaders have been wrong about nearly everything. In December 2009, the European Central Bank (ECB) said that an expulsion from the euro “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.” Never before has the ECB’s analysis looked so wrong and ultimately, listening to perverted advice leads to perverted results. (See MF Global’s blown up euro bets.) 

ETFguide’s Profit Strategy ETF Newsletter and Weekly Picks provide an unconventional but direct strategy for investing and trading the euro crisis. It also provides a no nonsense perspective of which ETFs will lead and which will lag.  

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