Where now for the Euro? | Greek bargaining power is still constrained

One good thing about the result of the Greek referendum yesterday (Sunday) is that it was conclusive. The reigning government is now more firmly entrenched than ever and, whatever about the political leanings of the regime, the markets will at least welcome the lack of uncertainty in this regard.

This fact was reinforced by the relatively mild nature of the reaction of the Euro – dollar pair (EURUSD) at the open of the Asian session this morning. While there was a gap down, it was significantly smaller than the one that greeted the announcement of the intention of the Greeks to hold the referendum, at the start of last week.

It is perhaps too early to say, but up to now at least there has been little to raise fears that the Greek situation will spread to the rest of the Eurozone, which is what happened when bailouts were threatened or actually implemented in Portugal, Spain, Italy and Ireland, as well as in Greece. This is the much feared contagion. The others seem now to have well and truly weathered the storm, so from the point of view of the EU and the IMF, Greece has hopefully been placed in the isolation ward.

If such contagion were to materialise, it would almost certainly be followed by an acceleration of Eurozone Quantitative Easing (QE). This would have the effect of widening even further the monetary policy divergence between the Eurozone and the US, and bring a further fall in the Euro against the dollar. This is the tendency anyway, and the dominant, long-term trend for the EURUSD pair is still to the downside.

Greek bargaining power is still constrained

However much the government of Mr. Tsipras may feel that its stance has been vindicated and, in the words of the RTE (Irish TV) reporter on the ground in Athens, David Murphy, even if the celebrations in the Greek capital last night were reminiscent of those that would follow a World Cup win, the fact remains that only a very small proportion of the people who belong to the Eurozone as a whole have had a chance to contribute to a referendum result which could have far-reaching effects for the Common Currency.

The resignation of Yanis Varaoufakis, which was apparently requested by Tsipras at the behest of certain EU finance ministers, is one measure of the power the EU still feels it has in relation to the Greek situation.

It will be a real tight rope walk for EU leaders to reconcile what is a genuine sympathy on the part of the rest of Europe for the Greek people, for whom the austerity pill seems to have had a disproportionate effect, and the reality that there are hard-left forces waiting in the wings in a number of other member states who are only too ready and willing to emulate their counterparts in Syriza if major concessions are implemented for Greece.