The Greek saga has stretched on for quite a long time. Previous bailouts in 2012 and 2010 aside, the Greek crisis has been in the news since early March. As the situation became recognized as incredibly dire, articles supporting and contending a possible domino effect in the Eurozone have become commonplace. The basic premise reads like this: if Greece is forced to leave the euro because of high debt and unfavorable currency conditions, wouldn’t that same logic appeal to the leaders of debt-strapped nations Portugal, Spain, and Italy? Complicated flow charts were released by major banks pointing out what could happen if events transpired in a certain way. Analysts changed their “base case” from deal to no deal, from euro to Grexit.
All of this uncertainty, and the abundance of possibilities as to what will actually happen, has resulted in volatility everywhere. Currency markets have set aside all news and focused on Greece for major movements. The US stock market has risen and fallen as positive and negative events have occurred regarding a settlement for Greece.
After all of this, it seems like we’ll have clarity by Sunday. This is admittedly a headline that has been seen a few times already this year – to no avail – but both sides seem to see this as the end. In the midst of these hectic negotiations, I feel that people are losing their perspective in the short-term focus. Whether or not Greece reaches a new bailout deal, the EURUSD will likely weaken for the next few years, if not begin to break as an economic system.
Greece’s GDP makes up less than 2% of the 13.4 trillion Eurozone GDP conglomerate. In contrast, Italy, Spain, and Portugal together make up about 29%. The global reach of the crisis doesn’t lie in Greece exiting the euro, but in the livelihood of the euro system itself. If Greece restructures its debt, that debt in no way disappears. Restructuring only delays the inevitable: a massive liquidity crisis and economic breakdown. Italy, Spain, and Portugal must realize that belonging to the euro has inflated their currency to a very unhealthy extent. The euro reflects the strength of Germany and masks the weakness of these countries’ economic output with an artificial inflation.
The US rate hike will compound the uneasiness these countries feel in the euro as a system. The USD will probably rise from rate hikes as the EUR falls from QE in 2016. As Europe lowers rates to combat deflation, asset bubbles will rise and recession may very well come about. The Eurozone is similar to a currency peg, where all 19 countries are pegged to the German mark (which the euro effectively took the place of). When the other 18 countries can no longer stomach the constant economic upheaval, they’ll be forced to leave the euro union in the interest of re-attaining a sovereign monetary policy.
What does all this mean? Grexit or not, the euro could still be in big trouble.