How to Profit from Call for Deeper Eurozone Integration

European Central Bank President Mario Draghi told the European Parliament on Thursday that the eurozone must become more integrated.

Draghi said that the most important step in leading the eurozone out of its current sovereign debt crisis would be to create a new "shared fiscal compact" in which national governments gave up some budgetary control to a central authority. In the past, eurozone governments were expected to keep their budget deficits below specified targets but many countries exceeded the targets repeatedly without any repercussions.

Now the entire eurozone is feeling the delayed effect of allowing states to overspend and the eurozone is under severe financial pressure that could see it collapse. The governments of Greece, Ireland and Portugal were all forced to seek bailouts from the European Central Bank (ECB) and the International Monetary Fund (IMF) after the markets lost faith in the countries' abilities to repay their loans.

Recently, the markets have begun to question whether or not Italy or Spain could be the next to require bailouts to prevent them from defaulting on their debts. Italy saw its borrowing costs skyrocket earlier this week when the yield on its 3-year bonds jumped to nearly 8% in its latest auction. Such a high interest rate is not sustainable in the long run and European Central Bank President Mario Draghi has been under pressure to prevent a eurozone financial collapse.

The European Central Bank has already been buying Italian and Spanish debt but that hasn't kept yields from climbing higher. There have been calls to allow the European Central Bank to buy unlimited amounts of debt from troubled eurozone members like Italy and Spain but that would be beyond the bank's current mission, which is more focused on keeping prices under control.

If the eurozone members budgets were under more scrutiny and they were no longer allowed to run huge deficits, the investor confidence might be restored to the point where some of the more radical ideas such as eurobonds wouldn't need to be employed to drive down eurozone borrowing costs.

ACTION ITEMS:

Bullish:
Traders who believe that European Central Bank President Mario Draghi's call for a "shared fiscal compact" is a move in the right direction might want to consider the following trades:

• If some confidence could be restored in the eurozone by Draghi's fiscal compact idea, the CurrencyShares Euro Trust (NYSE: FXE) could climb higher.

Bearish:
Traders who believe that Draghi's idea would be too little, too late for the eurozone may consider an alternate position:

• The Swiss franc and the Japanese yen could move higher if investors move money out of the euro into the two safe haven currencies. If this happens, the CurrencyShares Swiss Franc Trust (NYSE: FXF) and the CurrencyShares Japanese Yen (NYSE: FXY) could become profitable investments.

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