My Big Fat Greek Problem

Greece's economic woes have been a continuous source of stomach pain for European Union officials and euro investors alike over the past few months, the result of a crippled Greek economy and increasingly-dire worries of an economic collapse in the Balkans. As the crisis continues to develop, investors are eyeing the ups and downs of the Greek economy - and, indirectly, the euro - with interest.

Today, the euro - down quite a bit over the past few months against the dollar - rebounded somewhat against the dollar as confidence in the solutions proposed by the EU and Greek government rose. It is clear that the situation has stopped getting worse by the day - but is it on its way to getting better?

My money is on 'no'. Look at gold, for example. Gold has been bolstered lately by the fact that investors want to hedge against a huge, gyro-flavored drop in the euro. Also, the Greek parliament has yet to propose anything definitive - all we are receiving is news of pay freezes. Pay freezes in what, exactly? What part of the Greek economy can withstand pay freezes and construction freezes and budgetary freezes without seizing up and causing more problems? It is also pretty clear that the Greeks will have to raise tax rates to close their massive budget gap for FY2011; how they will do that without causing fallout in their already-weakened economy is anyone's guess.

With that being said, it seems that the Europeans, by and large, have clawed their way a few more inches back up the cliff. My fear is that this rebound (if you could call it that) is built more on hope rather than substance. I reiterate my prediction that the euro will, on average, continue to slide against the dollar and yen over the next 3-6 months (trending right now more towards 3 rather than 6, but that could change rather quickly).