Europe was plunged back into uncertainty on Monday after weekend election results in Greece saw a radical, anti-austerity party taking the reins of power for the first time since the euro currency zone plunged into crisis six years ago.
Together with the European Central Bank’s announcement that it will be launching a massive bond-buying program, the Greek elections helped push the value of the euro currency to an 11-year low against the dollar.
Many analysts expect the euro’s plunge to continue amid uncertainty over the future of the world’s largest currency bloc.
And yet, the news on Sunday wasn’t as bad as it could have been, some are arguing.
European markets largely took the Greek election result in their stride, a signal that Europe is perhaps now better equipped to deal with political uncertainty in the 19-nation currency bloc than three years ago when Greece teetered on default.
“A lot has already been priced into the euro exchange rate, that’s why the market is responding calmly.”
Unlike in 2012 – when the possibility of a Greek exit posed an existential threat to the entire euro zone – most economists and financial traders said the developments over the weekend no longer hold the same fear factor this time around. The uncertainty surrounding Greece is just one more problem that can be added to many the long-term questions facing the euro over the coming years.
The common currency used by 19 European countries plunged below 1.11 dollars as initial results Sunday evening suggested the anti-austerity Syriza party had not only won Greece’s national elections but may have achieved an outright majority. Final results put Syriza just short of this goal, meaning it will have to find at least one coalition partner to form a government.
By Monday morning, the euro had climbed again to 1.1228 dollars – back to levels last seen on Friday. Most analysts said they still expect Greece to remain in the euro, as Syriza has said it wants to negotiate a deal with its public creditors, and they expect little immediate fallout for the rest of the euro zone.
“A lot has already been priced into the euro exchange rate, that’s why the market is responding calmly,” Christian von Schuler, an equity trader at German private bank Hauck & Aufhäuser based in Hamburg, told Handelsblatt Global Edition.
Even the worst-case scenario – a Greek exit from euro – no longer sparks the kind of existential fear it once did. Since 2012, Europe has put in place a series of pan-European rescue programs that have raised the confidence of many in the markets that the currency is here to stay. European Central Bank president Mario Draghi also pledged that year to do “whatever it takes” within the ECB’s mandate to hold the currency together.
“It could still come to a ‘Grexit,’ but this would no longer lead to a crisis. The contagion effect for Spain, Italy and other countries, was the biggest risk for markets but this risk has subsided. That’s why the euro is relatively stable,” Thu-Lan Nguyen, a foreign currency strategist at Commerzbank in Frankfurt, told Handelsblatt Global Edition.
Despite the uncertainty now facing Greece, analysts said it is the European Central Bank that will have the biggest impact on the future path of the euro currency. The ECB’s decision last Thursday to launch a massive €1.1 trillion bond-purchasing program has continued to make the most waves on the market – even after Sunday’s elections.
“The ECB’s decision on Thursday is without doubt the dominant market development at the moment,” said Hendrik Lodde, a rates analyst at Germany’s DZ Bank. “Greece is certainly a very large uncertainty factor…but volatility in the market will most certainly not be the result of Greece alone.”
Mr. Lodde pointed to other looming factors – the development of the euro zone’s economy, the path of inflation, upcoming decisions by the U.S. Federal Reserve, oil prices and the inflation outlook – that held at least as much potential to affect the euro currency’s path over the coming months.
Still, the Greek result has heightened concerns that the euro zone is in for some tough times ahead. In particular, it has raised fears that other countries in the currency bloc might also be tempted to ease back on their commitments to cut public spending and undertake the kinds of structural reforms needed to get their economies back in order.
Policymakers across the euro zone have called on Greece to maintain its reform commitments. Pierre Moscovici, the E.U. currency commissioner, said the deal over a rescue program was struck with Greece as a whole, and not with any one party. Jens Weidmann, president of Germany’s Bundesbank, warned in an interview with German television station ARD that there could only be an aid program for Greece if the country stuck to its commitments.
Jörg Krämer, the chief economist of Commerzbank, noted that many leftist parties across Europe welcomed the Greek vote because they “have rightly recognized that the election results in Greece are a major setback for the reform policies in the entire monetary union.”
“All in all, the Greek election confirms our view that the euro area remains stuck halfway when it comes to the solution of the causes of the debt crisis. In particular, we see no reform breakthrough in Italy and probably also not in France.”
Mr. Krämer said the odds of Greece itself remaining in the euro zone were still at 75 percent. Mr. Lodde of DZ Bank noted that this was one of the key reasons the market reaction has not been more punishing.
But even if Greece should be forced out of the common currency, there are many who believe Europe is able to deal with the consequences.
“This is a possible catastrophe for Greece, but not for Europe,” Holger Schmieding, chief economist of Berenberg Bank, said in a research note.
Christopher Cermak is an editor at Handelsblatt Global Edition in Berlin, covering the financial markets. Gilbert Kreijger reports on companies and markets for Handelsblatt Global Edition in Berlin. To contact the authors: firstname.lastname@example.org; email@example.com.