Market Overview

How Germany Could Inadvertently Destroy the Euro and Doom Its Economy


Reports say the German government is pushing to delay the second round of Greek bailouts until the end of the summer, but with riots increasing in intensity, it seems unlikely that the Greeks can wait that long. A delay might lead to Greece defaulting or exiting from the Eurozone.

German government officials are lobbying to delay the deadline for a second Greek bailout package. German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble favor pushing the deadline back to September, Reuters reported.

The proposed delay comes at an odd time. Protests in Greece intensified significantly on Wednesday, leading to intense speculation over the future of the Greek government.

A report surfaced early on Wednesday stating that Prime Minister George Papandreou was willing to resign if a unified government could be formed with the opposition conservative party.

Later in the day, according to Salon, Papandreou denied ever stating that he was willing to resign.

Initially, the deal over a second bailout package was expected to be completed by July. Pushing the deadline back may trigger Greece's default. NPR reports that Greece will, if the status quo is maintained, run out of money next month.

If Greece is allowed to default, it could create shockwaves in the entire structure of the euro and lead to the currency's demise.

Knowing this, is the German government, in asking for a delay, stunting for some political motive? Or does it fully intend to push back the second package?

Dennis Gartman speculated that Germany would eventually grow tired of the Greeks and withdraw from the euro. He stated on CNBC that he expected the process to take two or three more years.

Maybe Gartman is right in his general premise, but horrendously wrong in his timing.

If Greece is forced to withdraw from the euro, it may set a dangerous precedent, wherein other indebted countries like Ireland and Portugal withdraw from the euro rather than face harsh austerity plans.

Assuming the German government is aware of this fact, are they hoping to destroy the euro zone?

Germany is the strongest economy within the Euro zone, presently humming along at a modest pace. Its economy, in large part, benefits from the use of the euro, as its manufacturing sector gains an advantage from having its exports priced in a weaker currency.

If the euro collapsed, or otherwise shrank down to include just the center of the Euro zone, German manufacturers may have to deal with a significantly stronger currency. That might make German products less attractive to foreign consumers, and thereby weaken the broader German economy.

Thus, it seems puzzling that Germany would want to force Greece out of the currency. Perhaps there are other factors at play.

Action Items

Bullish: Traders who believe that Germany will defend the euro, and is merely politically posturing, might want to consider the following trades:

  • Buy Wisdom Tree Dreyfus Euro ETF (NYSE: EU) in a long euro play. If Germany defends the euro, it may snap back in value, and EU might do well.
  • Buy Power Shares DB US Dollar Bearish Index (NYSE: UDN) in a short dollar play. The U.S. dollar index is up, despite weak economic data in the U.S., perhaps suggesting European traders are buying it on a safe-haven play. If confidence in the euro is restored, these traders may pull their funds out of the U.S. dollar and it could depreciate.

Bearish: Traders who believe that Germany intends to see Greece abandon the euro, or an outright destruction of the currency, may consider taking positions in the following:

  • Pro Shares Ultra Short Euro (NYSE: EUO) is a short euro play. EUO has rallied nearly $1 over the past two days, and may rally further if the euro comes under continued pressure.
  • iShares Lehman Aggregate Bond (NYSE: AGG) is a long play on U.S. government bonds. AGG may do well if investors have to flee the euro area for safety in the United States.

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