Dig out your Drachma….you might need it.

It has been 2 and a half years since Europe’s debt crisis erupted in Greece, but as authorities in Athens continue to struggle to form a government the country’s exit from the Euro is becoming increasingly likely.

The EU maintains it wants to keep Greece in the Single Currency, although today’s front page headline of Germany’s most influential magazine, Der Spiegel, read “Acropolis, Adieu! Why Greece must leave the Euro” indicating Germany is coming to terms with a possible departure (by their own admission, they can’t force Greece to remain within the member state). Opinion polls suggest the majority of Greeks want the same thing – yet they continue to vote for anti-bailout parties.

The fact is Greece is broke; a report last week by Bank of America Merrill Lynch claimed the country would run out of money by early July should creditors decide to withhold their next aid payment. Even if the next bailout is granted, any elected Greek government would need to propose new medium-term austerity measures and demonstrate savings of €11 billion next month!

So what if they do leave? A Greek departure is likely to cause worry amongst investors of withdrawal by other member states…..mocking a monetary union that by design was supposed to be irreversible. Bond yields will soar (Spain’s 10yr bond yield is already well above 6%) and the Euro is likely to come under further pressure. EURUSD moved below $1.30 last week for the first time since January and EURGBP hit a 4 year low, testing 0.8000.

These are very uncertain times for Greece and indeed the Eurozone as a whole.

Hollande vs The Euro

The French Elections will certainly have an impact on the Euro and should Francois Hollande defeat President Sarkozy, the impact could be significant.

The Socialist leader has promised to renegotiate the European Union Fiscal Compact and has promised to concentrate on growth rather than austerity…..quite where this growth will come from remains to be seen of course. Hollande’s stance could well cause tensions with Germany if not managed properly, leading to a crisis in confidence in the Eurozone’s two most powerful members. Bond yields could soar yet again and whatever strength the Euro still holds against it’s major trading counterparts could be diminished.

Euro fails to hold onto gains after ECB Rate Decision

The Euro fell against the Dollar yesterday after the European Central Bank kept interest rates at 1%.

The Single Currency had previously rallied following comments from ECB President Mario Draghi, who stated the central bank had not considered lowering the headline rate and inflation was likely to remain above 2% throughout 2012.

Opinion remains divided over the outlook for the Euro, with many questioning why it has not fallen further given the uncertainty in the Eurozone. However, a growing number of analysts are predicting long-term Euro weakness as the member state struggles to cope with and address the crisis.