Euro Family Feud: the Bad vs. the Ugly

04/05/2010 11:36 am EST

Focus: GLOBAL

Gregory Weldon

President and CEO, Weldon Financial

Greece’s problems haven’t been solved, and portend continent-wide austerity, writes Gregory Weldon of Weldon’s Money Monitor.

Note comments from Greek Deputy Prime Minister Theodoros Pangalos: “I am quite worried that if a decision is not taken quickly, then the euro makes no sense, and if the euro fails, this will take us many decades backwards in terms of European integration.” And thus [the recent] plunge in the European currency, which comes amid a worsening technical condition as defined by the bearish moving average cross-over and the negative momentum reading.

Moreover, Pangalos pointed the finger at German banks, accusing them of exacerbating the Greek situation by “speculating” in the Greek fixed-income markets, calling the scene “deplorable,” while criticizing the German government, saying they were not coming to the rescue because they are actually OK with the decline in the euro, since it gives German industry a chance to “win massive exports to the Third World.”

We have said all along that the European debt-deficit debacle is not a Greek problem; it is a region-wide problem, and it is not a short-term situation, but rather this is a secular crisis that will take years to reconcile via fiscal austerity.

[A] “solution” is not a monetary bailout. With 25 of 27 European Union nations in violation of the Maastricht Treaty regulations governing debt and deficits, individual nations, including Germany, are not even in a position to aid Greece. Indeed, the EU Commission actually warned Germany on its debt [recently], highlighting the fact that Germany is in violation of the gross debt ceiling by a significant degree, and should (according to the rules) be penalized, just like Greece.

Perhaps most interesting and quite intriguing is the weakening in Eurocurrency-denominated gold. Indeed, gold in euros is actually looking vulnerable, amid thoughts of fiscal austerity that may spread from Greece to the rest of Europe.

We are somewhat fearful that the rally in Eurocurrency-priced gold is predicated upon expectations that a monetary-styled bailout rescue package will provide the solution to the European debt-deficit debacle. The only real solution is tighter fiscal policy—much tighter! Such an outcome is not bullish for gold in euros. Neither is the push higher in US dollar LIBOR [rate] late last week positive for gold. However, thoughts of a broader EU fiscal austerity push imply that the European Central Bank will not be raising interest rates and tightening monetary policy at the same time.

For sure, [recent] monetary tightening in India via a hike in official short-term interest rates amid a spike in domestic inflation is not supportive to gold. We remain bearish on the euro currency. And we are closely monitoring the US dollar-based price of gold, as any overt weakness would strongly suggest that a new trading opportunity is emerging.

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