Sunday, February 1, 2015

In any negotiations, you must know where the power is | Will Greece affect the Euro?

According to news reports, the new Greek government has set out on a course to play real hardball with the rest of the European Union. In many ways it is constrained to do this, as it was on precisely this platform that it was voted into office in the recent elections. Did it promise more than it can deliver? In any negotiations, the party with the greatest degree of power is likely to be the one that calls the shots. In this case it is hard to see where Greece’s power resides.

The one and only card they seem to have to play would be to threaten to withdraw from the Euro, the so-called Grexit, or Greek exit. Various significant players in the EU have let it be known that they would prefer to maintain the integrity of the Single Currency as it now exists, which means continuing Greek membership. However, at this stage of the game, this looks like something that would be nice to have, rather than something that is essential for the continuation of the monetary system that is the Euro. The reasons for this have to do with the stage at which the bailouts of the other previously problematic peripheral member states have reached (including major-bank recapitalisation and completed stress tests), and the fact that Greece is now effectively quarantined from the rest of the Eurozone in terms of being the cause of economic contagion.

How will it affect the Euro?

Back in 2010 / 2011, the Euro suffered badly against its global counterparts due to the fear of such economic contagion from Greece into the rest of the Eurozone. Now there is also a fear of contagion, only this time it is in relation to social unrest and political disruption. And this is the reason why the ECB and the core member states cannot allow Greece any leeway at all in its demands, whether that is for debt forgiveness or a debt resolution conference that is aimed at something similar. The first hint of a concession in this regard will create the conditions that would lead to government overthrow in more than one other peripheral member state, with further demands for concessions similar to those sought by Syriza. The end result would be chaos, and a real prospect of a Euro break-up.

Now the Euro is also falling in value, only this time it is due to a measured and deliberate action on the part of the ECB, mainly by the introduction of Quantitative Easing (QE), rather than to market fear of economic contagion from Greece. And that makes all the difference. 

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