Will Problems in Greece Drive the Euro Down?

It has been more than three years since we first started writing about the Greek debt crisis. In the years following the start of a worldwide recession Greece was one of the European nations in danger of defaulting on its sovereign debt. There was talk of Greece leaving the European Union followed by the rest of the so called PIIGS nations (Portugal, Ireland, Italy, Greece and Spain). The nightmare scenario many envisioned was a collapse of economies along the southern tier of the Euro zone. The issue was finally resolved with multiple loans from the European Central Bank and a new government in Greece instituting strict controls on spending. Riots subsided and Greece started on a road to recovery. Now there is political instability in Greece. Elections could lead to a new government that will tear up previous agreements with the EU. According to Reuters

The euro fell broadly on Wednesday amid growing concerns over the political situation in Greece that could increase the chances of monetary policy easing early next year by the European Central Bank.

The euro was down 0.5 percent against the yen at 147.40 and gave up early gains against the dollar to trade slightly lower on the day at $1.2370. The common currency had risen to a high of $1.2448 on Tuesday as investors trimmed long dollar positions, booking profits ahead of the year-end.

The Greek government has brought forward to next week a presidential vote that will force nearly two dozen independent lawmakers to decide whether to side with Prime Minister Antonis Samaras’ pro-bailout cabinet or with leftist radicals who have vowed to tear up the bailout.

The concern at this point is not that Greece will leave the EU but that the price of repeated bailouts will drive down the value of the Euro just as the region is threatening to sink back into recession.

Political Uncertainty

According to sources such as Morningstar it is the political uncertainty in Greece that is locally hurting stocks and driving up bond interest rates as well as threatening the value of the Euro.

Earlier in the week, the Greek government announced that parliament would vote on a new president on Dec. 17–two months ahead of schedule–to replace Karolos Papoulias, whose five-year term was slated to end in March.

That sparked fears that Greece’s radical left opposition Syriza party could win national elections if presidential voting rounds fail to find a solution acceptable to all. The latest opinion polls suggest that Syriza, which has threatened to tear up the economic overhaul and austerity program that has accompanied the country’s international bailout, would win national elections by a three-to-six percentage-point margin, and could precipitate a new crisis with Greece’s creditors.

The argument about fiscal responsibility versus fiscal stimulus measures has gone on in Europe for years. Led by Fed chairman Bernanke the US Federal Reserve carried out a more than trillion dollar quantitative easing program to stimulate the economy and keep lines of credit open. This approach has been tried recently in Europe but without the resolve that the US Federal Reserve used.

How Will This Work Out?

Greek problems or not the EU is probably going to opt for stronger stimulus measures which will drive the Euro down. For Greece there are, according to MarketWatch, 2 ways out of their debt dilemma. The debt crisis has become chronic and so has economic stagnation. What are the solutions?

What better way to mark the anniversary than by actually fixing the problem – either by the Greeks getting out of the eurozone, or else by restructuring the country’s debts so it actually has a chance to grow again. Either would surely be better than a grinding recession which, despite a modest upturn this year, shows little sign of ending.

In order for Greece to emerge from their eternal debt problems and economic stagnation the EU either needs to ramp up stimulus measures to get the economies going again along its southern tier or it needs to clean house and find other political and economic ties within the EU that allow countries like Greece to devalue their debt and get a fresh start. In the meantime traders are confronted with the dilemma of how far the Euro might fall as this crisis continues.