For the past few weeks, the Forex market has been a sea of unpredictable volatility as waves of positive economic data from the US keep pushing the greenback higher and higher against its major counterparts-namely the Euro. However with the European Union Summit quickly approaching, and speculations swirling the market that the EU would be assisting Greece with tackling its deficit problem- the Euro managed to regain some of its lost strength.

With news circulating more and more about Greece, its severe financial problems and its resulting detrimental effect on the EU and the Euro- one has to ask, what is going on? No one has cared this much about Greece since the height of the Greek Empire, so what is the big deal?

When the European Union formed and adopted a single currency over a decade ago, none the 15 original founders would have ever suspected that it would be the tiny country of Greece that could potential bring forth Europe and the Euro’s downfall. But that is exactly what is happening- and if this Mediterranean country doesn’t figure out a way to fix its debt problems soon, the European Union and their domineering single currency will go the way of the Ancient Greek Empire.

So basically what went wrong? When Greece joined the Euro zone the Greek government failed to implement economic reforms as well as reduce public spending – including a huge military budget. Greece entered the recession ill equipped to cope, and as a result government debt was bigger than the economy last year. The Greek government reported 12.7% deficit of its current GDP, far above the EU’s requirement that its members keep their deficit below 3%.

Since news broke out that Greece was suffering from major financial difficulties, the Euro took a turn for the worse, tumbling against its major counterparts. The euro, which has become one of the world’s strongest currencies since its introduction over a decade ago, is now down 5 percent against the dollar this year. The euro’s decline picked up speed when the European Commission’s statistical office revealed in mid-January that Greece had been submitting false data to calculate its budget deficit. (Late last year, Greece stunned investors by saying that its government deficit would be 12.7 percent of its gross domestic product, not the 3.7 percent the previous government had forecast earlier).

The resulting fall in the value of the Euro, illustrates that the stakes are not just high for Greece- but for the entire euro zone. With the increasing possibility that Greece’s deficit problems will spread to other peripheral Euro zone countries- namely Spain and Portugal- the EU’s effort to forge a common economic identity is threatened by the financial crisis.

“We have a centralized monetary policy, but we allow budgets and wages to move in different directions,” said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, José Manuel Barroso. “Without a political union, in the long run the euro zone cannot last.”
While economies of the core European countries, such as France and Germany, show signs of recovery, Greece, Portugal, Ireland and Spain are being splashed by a new wave of economic disaster. Spain, the largest of the peripheral economies, announced last month that the number of its unemployed had reached four million — the highest in its history — and warned that the country’s deficit might be worse than previously thought.

There is no doubt that the EU economic summit on Thursday will focus on the “Greek Problem”- but what will come out of the summit is yet to be seen. If a solution cannot be determined, soon-ish…the EU may very well suffer the same fate of as Ancient Greece.

Every time the President of the United States makes a speech, the market- both Forex and Equity- reacts. While last Wednesday’s State of the Union Address may have had a temporary positive effect for the USD, the American public suffered from mixed reactions.

Is it over yet? That was the question President Obama addressed in his State of Union Speech. The president, typically an eloquent and charismatic orator seemed to be lecturing the American public, rather than trying to persuade them. Although towards the end of his 70 minute address, he finally fell back into the “YES WE CAN” mood of his campaign, and with every round of applause he smiled as if to say - see they still love me.

Unfortunately for the president the mood of the US has shifted over the course of the past year. Gone with the wind are the days of complete trust in whatever the president says. Now Americans are skeptical and wary more and more of big government’s role in their lives, and with unemployment reaching 10%, the public still believes that this recession is far from over.

The rapid decline of approval in the Democratic actions, or lack thereof, can be clearly seen by the completely unexpected win of the Republican Senator in the very liberal state of Massachusetts. This seat - which was previously held by the late senator Ted Kennedy, is considered to be one the safest seats to win for the democrat party- was won by a Republican who spoke about reducing the deficit, stopping the democrats health care reform and lowering taxes. The fact that Massachusetts has not voted for a republican senator since the late 1960’ should be a wakeup call for Obama. The country wants him to move to the center and to govern form the center as he promised in his campaign.

However, as Mr. Obama’s went on into the night, it became apparent that he has not woken up. While the speech contained some valid points- such as the Deficit freeze and capital gains cuts for small business- as he continued to speak, it became more and more clear that his address was full of contradictions and empty promises.

The speech started with some good points mainly the Budget Freeze. However, Mr. Obama followed this by stating that there would be no budget freeze until 2011- and that the saving he anticipated from this budget freeze would only reduce the deficit by 3% (about $15 billion in total- hardly enough to put even the slightest dent in America’s $1.35 trillion deficit).

While his proposal to cut the capital gains tax for small business investment is a step in the right direction- the planned propositions falls short of what is needed to generate jobs and economic growth. Moreover, this statement seemed even more confusing and conflicting, as he stuck to cap-and-trade legislation, which will in affect increase taxes on business and will kill jobs.

Next he moved on to job creation- another very positive point. While on the surface it sounds very nice that he wishes to create new jobs, you have to ask yourself, how does he plan to create these jobs? And what types of jobs does he even plan to create?
Moreover, when the Bush administration tax cuts expire next year the taxes of the people who own businesses that provide jobs will increase. If a business pays more in taxes it tends to hire fewer workers.

This speech clearly exemplifies that Obama still retains his core belief that big government and government control is the answer to all problems- the opposite of Bill Clinton who in 1994 said in his state of the union that “the era of big government is over” which began a cycle of growth and prosperity. Obama , unlike Clinton is refusing to move to the center. It’s nice that students will be able to get loans that they won’t have to repay so they can go to college. But where are the jobs when they graduate? Obama’s answer is to spend, spend, spend. This is not the change that most Americans believe in.

Following the shocking Republican win in renowned liberal state of Massachusetts, President Obama desperately tried to win the approval of his democrat supporters by announcing his purposed plan of financial reforms for the Wall Street banks.

With the uncertainty of what these new regulations will mean for taxes and compensation foreign institutions are suddenly very wary of investing in countries that are considering imposing such rules. The US, France and Great Britain are deliberately shaking the confidence in the banking sector by threatening to impose these new regulations. This is not healthy for the global economy and may even threaten the global recovery.

It may be popular to bash the banks but is it good fiscal policy? Obama has proposed to limit the size of banks and their holding companies. But as the wall street journal pointed out the “problem with limiting the size of these institutions is that no one has the faintest idea what the right size is” What is the right size that will prevent a bank from being too big to fail? Who knows? Certainly not the congress.

The next proposal is to prevent “proprietary trading”. It may sound impressive to say we will now control these out of control banks, but there are already regulations that limit what a bank can and can’t do with their deposits that are government insured. Banks can’t participate in underwriting or deal in securities. As for the bank holding companies they are using money that is not government backed and so why should the government stop them from doing what they want with their own funds?

Obama wants to stop these risky practices. However there are measures already in place that protect the banks from the riskier activities of their holding companies. All these new regulations will do is force the bank holding companies to stop doing what they do best - make money. But why stop with just the big banks - “if we are going to stop Goldman Sacks and Morgan Stanley from taking risks in securities trading because they are too big to fail, why not stop securities trading by all large investment firms or insurance companies?”(Wall Street journal)

Finally, it is important to remember why there was a financial crisis in the first place - it was caused by subprime mortgages which led to banks failing and needing to be bailed out because they had too much invested in these risky mortgages.

But if the banks are prevented from engaging in securities trading they are left with few options for investment and one their only options is real estate. The last real estate bubble was not an isolated historical event- real estate goes up and down - and so another bubble followed by a bust could cause another banking crisis if the banks are forced to concentrate their investments in this area.

“Instead of trying to punish the banking industry, Obama should try to understand why the banks became so heavily invested in real estate” Instead of enforcing punitive new restrictions “the solution to the long term problems of the banking business is not to narrow the activities of bank holding companies but to broaden them.” This is not the popular thing to do - it may look like a reward for bad behaviour but in the long run it could prevent a future crisis.

As for the Forex market, the USD is in for a rocky road. Since being sworn into office, we are have yet to see the results of president Obama’s “Changes”. With US unemployment at 10%, the country and the world want to see results not hear more talk. Obama will have to do far less talking and more successful and economically sound financial decisions for the world to resume its faith in the American currency.