Greece Not Such a Tragedy?

Fear has been escalating in markets for the past few sessions, as optimism about the Obama jobs plan faded and worries over Europe intensified. The VIX climbed back above the 40 level and the S&P 500 has fallen back to near-term support around 1,140 in early Monday trade.

As of noon eastern, it looks as though there is a very good chance we break 1,140. Then I think the next stop is 1,050 on the S&P where I will be a buyer of stocks as I wrote on August 31 in "Gray Skies = S&P 1,050 Bottom."

But right now, let's focus on this catalyst of contagion and contraction we call the Eurozone. The question on my mind is this: "How likely is it that Europe allows Greece to fail its obligations and does this spell doom for the monetary union?"

I've said for over two years that the European authorities would not let the common currency experiment fail. They have too much at stake. In my June piece "Will the Euro Survive?" I summarized the battlefield thus...

Right now, the euro is consolidating in the middle of a significant long-term trading range between $1.20 and $1.60 and the tug-of-war tension is between the US dollar printing press on one side and the structural debt crisis of the European monetary union on the other. As I've said for two years, it's really a fundamental battle of whose debt problem matters more between the largest producing economies on the planet.

On the chart, the 10 and 20-week moving averages are still pointing bullish, but looking like they could be ready to roll over. And the big picture is one of lower highs from the monthly view... $1.60, $1.5140, $1.4940 over the past three years.

Germany Controlling the Game on Multiple Levels

Everyone knows that the Germans hold the power in this game of chicken. They have the economic firepower and the eurozone political power to make big decisions that affect the fate of Club Med countries like Greece.

But they also appear to be caught between a rock and a hard place. On the one hand, they face global pressure to save the union. On the other, their own people wonder why German wealth and productivity should be squandered to bail out spendthrift nations.

Often I have wondered, "Does Angela Merkel go home and put back a few bottles of weiss beer and some shots of Jagermeister?"

But here's the possible twist: Germany is okay with the tension and letting markets sort it out and overreact. There's no hurry for them to act on policy. And making abrupt decisions about the eurozone constitution could be disastrous.

What do they get for taking their time? They get a weaker euro which will sustain their export-driven economy during this time of slower growth. They certainly don't want their economy at the mercy of a super-strong Deutsche-centric currency.

Letting Markets Settle and Clear the Crisis

And they get to watch markets vote and weigh what they perceive to be the best outcome for the union. "Probation" periods for deficit violators? Forced country asset sales; a Greek isle anyone?

Yes, there are casualties along the way as we they "wait and see." Like French banks who hold so much Greek, Italian, and Spanish debt. Even the recent G-7 meeting didn't inspire a coordinated bailout frenzy to prevent a potential systemic banking crisis (though it's not wise to underestimate the power of the "Global Central Bank" if and when things get really ugly).

But crossing the line of "letting Greece go" would be a point-of-no-return decision. Once they do, everyone starts looking for "who's next?" Portugal? Spain? Italy? Shudder to think on the last one.

So while Merkel and Co. appear often defensive, rigid, and sometimes trapped, I think they are still holding most of the cards and playing them exactly as they want to.

For more that I've recently written on this topic see "Europe on the Brink: Does Their Fall Ensure Our Recession?"

Kevin Cook is a Senior Stock Strategist with Zacks.com

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