The constant barrage of headlines about Greece’s demise and dismissal from the European Union has made writers giddy with references to everything from Greek drama to Greek yogurt. Let’s add another one while we are at it: the Grecian Formula. For those who are not hair-follicle challenged, the Grecian Formula was supposed to grow hair. The Grecian Formula currently in place in negotiations is actually attempting to remove “hair,” or obstacles, that are preventing Greece from becoming a solid member of the European Union and enhance previously agreed upon austerity measures. With recent elections meant to send a message to Germany, another rise in the call of the demolition of the European Union has been hinted at should Greece depart.
It seems we have been down this road before, and recently, have we not? Recently, we witnessed a push to regulate financial tax accumulation as well as adhere to austerity measures to get the Greek budget deficit under control. In 2012, the world was occupied with a standoff for a country that barely makes up 2 percent of the European Union. To be sure, there are ramifications; however, we continue to see a real reason for the Eurozone wanting to maintain countries like Greece and Spain.

We have argued from a simple currency factor, Greece, Spain and Portugal create a counterweight to the euro’s strength. For countries so dependent upon exporting, the 19 percent drop from its highs as measured against the U.S. dollar is quite important. This move has nearly everything to do with the announcement of quantitative easing last year; however, the long-term value needs counterweights to the strength of Germany’s standing in the world. As we move through this and the public back and forth, we understand that the real negotiations are handled quite differently.

The newly elected prime minister will have to delicately balance pushing the agenda that he used to win the election and understanding the importance of maintaining some resemblance of stability. Stability is not something that Greece is accustomed to. A recent Merrill Lynch report concluded that Greece has been in some form of default or restructuring over 45 percent of the time since 1800. Only Mexico can count itself in that rarefied territory. We have been down this road many times before and would expect it to be so going forward.
All Greek dramas aside, Europe already is starting to show signs of pronounced rebounds.

Eurozone retail sales volume year over year are growing at a rate not seen since 2007.

·        Industrial New Orders in the European Region are still at 107.41, well above the long-term average of 92.84.

·        The European Commission Consumer Confidence number has shot up significantly as the euro currency plummeted. Though still negative, the trend is quite pronounced.

·        The European Purchasing Managers Index has also rallied recently after falling or the last year. The last two months have seen the services and manufacturing increase quite starkly.
The narrative most have about Europe has already been priced in and is poised for a rebound.
The Greek drama, though worthwhile reality TV, looks to be following the same path. The newly elected prime minister won on an anti-European Union platform; however, his party only received 36 percent of the vote. It appears to us that the most likely path will be an agreement that stays closer to the status quo than what most may think. The austerity haircut most likely will not lead to “Armageddonomics.” Rather, it will be fought in a public forum and resolved privately. This is the real Grecian Formula.

Matt Lloyd is vice president, chief investment strategist at Advisors Asset Management. Matt's commentaries range from a macro look at the U.S. economy to expanding global markets. He analyzes key economic indicators to discuss these driving the industry and current market strategies.