The Greek situation has plagued markets for more than a week. Merkel is playing tough. As my friend Yra Harris has said at his blog Notes from the Underground, in decades past Germany used the barrel of a gun to implement influence. Today, it won’t do that. But it is the most efficient producer in the EU. Germany had massive problems to overcome with the fall of the Berlin Wall in 1989. In 2003, the eastern part of Germany was fully integrated, and they were ready to forge ahead. They have.
Germany has a large social net, but it’s not structured the same as in other EU countries. It also has very efficient factories and has a cheap source of labor from Eastern Europe. If they bail out Greece, what incentive does Greece have to reform? If they bail out Greece, why shouldn’t Portugal, Italy, Spain and Ireland expect a bail out as well? Aren’t they creating massive moral hazard, even more pernicious than the US bank bailout last year?
Other governments, particularly the French, will try and use social pressure to force a bail out by Germany. France has the most to lose if the EU cracks. The German people are against the bail out, and rightfully so. Why should the German taxpayer bail out the largesse of the Greek government?
Merkel has the will of her people on her side. She needs to be tough, and I suspect she will wrangle control of the whole EU before it’s done. This will be the last step before the EU eventually takes a tumble. I hate to put a time limit on it, but I think that there is enough financial stress everywhere in the world. Eventually these exterior stresses and shocks will wear on the EU, and it will crumble.
There are a few plays off this. One, buy US Treasuries. Not only will Germany benefit from a break up, but the US dollar and Treasuries will benefit in the rush to safety that will ensue. European stock markets, and the rest of the world will fall on the shock. I see that as a buying opportunity. Companies will quickly adjust to doing business in the old climate, and the only real cracks will be the much higher interest rates several countries will have to pay to service their debt. That’s when the fat cat politicians will have to make some real hard choices.
Another sneaky back door play to making money is to buy an IMM seat at the Chicago Mercantile Exchange. Why? Because the CME is the worldwide leader in regulated futures currency trading. With the break up of the euro, volume will only increase. Seats go for around 450K now, and lease for around $1000 per month. You might want to buy some out of the money LEAP calls, or simply own the stock. The calls are a timing play. Owning the stock is riskier, but they pay a nice dividend.
It’s going to be an interesting soap opera to watch. I’ll buy the popcorn, you buy the Junior Mints.