Future of Euro Currency - France Leaving Euro - Romania Protests

Euro breakup threats with France and Romanian protests has prompted Euro carry trade selling. The rot continues with French Euro threats, Romanian protests, Euro and European carry trades selling at week’s end. We have seen the European trillion dollar emergency fund, the British coalition government in power and Spanish austerity plans all unveiled yet it seem all of Europe is unraveling here. after the market have digested As of early this morning, all of Europe is plunging, The at Euro at 2008 lows with a 1.2400 handle, sterling testing 1.45 against the dollar and the central European carry trades the Polish Zloty and Hungarian Forint off over 1.5%.

It is not just the being hit, but non EMU currencies being sold off also. The “wolf pack” smells blood with, Spanish unions announcing a public service strike yesterday, Greece striking again and talks of the French threatening to leave the Euro. Emerging Europe is also being squeezed, Romania is slashing government budgets by 25%, and pensions by 15% which has led to protests also. The big winners are precious metals with Gold threatening $1,250 and all time highs as we see Euro and European carry trades battered.

As the world focuses on the core European countries emerging Europe faces problems of its own as Euro and European carry trade selling picks up. The Polish zloty has fallen 1.1 percent against the euro from Friday's open, the euro traded at 4.0030 zlotys. The US dollar broke the key EURUSD $1.25 level. Bucharest stocks were the worst hit, falling around 2 percent. Stock markets in Warsaw, Moscow, Prague and Budapest fell around one percent Earlier in Asia, Indian and Chinese markets closed half a percent lower.

Desperate situations call for drastic actions. Something the U.S. and other countries have not remotely considered yet. Romania announced it will cut civil servants salaries by 25 per cent and that all pensions will be cut by 15 per cent on June 1. Romanian national statistics show the average pension is 734 lei (223 dollars), with the minimum pension 350 lei (106 dollars).

In the Romanian capital Bucharest, the east Romanian city of Galati and the northern Romanian city of Iasi on Wednesday several thousand pensioners demonstrated against the proposed austerity measures. There were minor fights between angry pensioners and police with a few pensioners having to be hospitalized.

The International Monetary Fund (IMF) Romanian officials last week agreed on drastic new austerity measures and structural reforms. Romania will receive a 20-billion-euro (25-billion-dollar) emergency loan from the IMF, European Union and World Bank. Romania has already received 12 billion Euros, but the crisis continues to worsen. Expects similar in Greece and the PIIGS should they access emergency funding. For those worried about central Government the IMF has linked the new austerity measures to the disbursement of the loan's fifth installment of 850 million Euros in June.

I have little doubt that we will see more signs that the Greek contagion is only just starting to affect reality and more events like Spain and Romania are on the cards. From a positive point of view this is better sooner rather than later. For Europe to spin around growth needs to not be bludgeoned to more worrying levels. Europe needs to maintain low interest rates or countries will be in danger of default.

Sure this story may be a lot of hot air, something French president Sarkozy is not immune from but it provides kindling for the Euro fire sale. Spanish newspaper El País reports that Sarkozy threatened at the Brussels summit of EU leaders last Friday 'a compromise from everyone to support Greece ... or France would reconsider its position in the euro'.

El Pais quotes Spanish Prime Minister José Luis Rodriguez Zapatero after. Zapatero revealed the French threat at a closed-doors meeting of his Spanish socialist party on Wednesday. The paper reports "Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."

In confirmation of the different sides drawn in Europe a different source from the Zapatero meeting told El País that "France, Italy and Spain formed a common front against German and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."

El País also quotes Sarkozy saying "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense". Comments like this only help see Euro and European carry trades battered. Whether true or not they help the markets justify short bond and currency positions. Euro and European carry trade selling needs some positive news to reverse the trend. History suggests the ECB will let the market get short and try and catch the wolf pack short and draw blood. Keep that in mind on any contrarian investments and trades.

A week into it and there is no respite from the Euro contagion. One suspects this will become a battle between the trading wolf packs (my new favorite term) and the ECB and its buddies. What markets will watch for is ECB intervention in the currency markets. Keep in mind that a weaker Euro is better for European exporters, think Germany and France.

Let us look at the extreme case of the euro at parity to the dollar, it is plausible given it has been near .80, and the high was over 1.60. At parity the PIIGS all become low-cost producers within Europe. Germany, Scandinavia and France become low-cost producers for high value-added exports and Germany and core Europe sees higher growth than expected. So who truly wins out of a lower Euro?

What Europe must do is paint a picture of a solid Europe with austerity programs that will leave Europe structurally stronger. What the ECB does not want to see is a currency declining due to structural fears. A currency declining due to excess liquidity, as the USD was until the PIIGS starting rolling over, is not a difficult fix.

This brings us back to the intervention question, what the ECB wants is austerity but not to the point that all economic growth is choked off this then suggests a lower Euro. The appropriate question than is does Europe want lower yields or a strong Euro at the moment. If the ECB accesses the swap line they will be reducing Euro liquidity as they increase USD liquidity by buying EUR/USD. Thus Euro bond yields would be pressured higher, meaning the ECB would have to intervene there also which they probably would not one to do. What the ECB wants is orderly markets and any intervention will be along those lines.