Symbolic Victory for the Euro

  on June 18 2012 1:56 PM

The euro symbol was originally designed to resemble the Greek epsilon, in homage to the country often considered the birthplace of Western democratic ideals. This weekend, it appeared that Greece might also become the common currency's graveyard.

Despite fears that the far-left Syriza party would climb to the top of the greasy pole and shred existing aid agreements, the pro-euro New Democrats prevailed. They will now begin talks with the mainstream socialist PASOK party on building a coalition government that would have a parliamentary majority.

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However, it should be recognized that the victory is largely symbolic.

The risk of a Greek exit has lessened, but the new coalition government will also attempt to renegotiate terms with international creditors in an attempt to reduce the country's austerity commitments. This lays the stage for ongoing volatility as markets worry about a misstep.

And in the broader view, an improvement in Greece does little to alleviate the worsening fundamentals that are weighing on Spain, Italy and France.

According to figures published by the Bank of Spain on Friday, payments on 8.37% of loans are now more than three months overdue - the highest since August 1994. This morning, yields on Madrid's ten-year paper are above the 7% threshold that previously derailed Greece, Ireland and Portugal.

The euro may yet meet its end.

But there is a real danger in missing the forest for the trees. While it is difficult to be optimistic about the common currency in the long term, existing political elites have little to gain and everything to lose if they allow the euro to collapse in the short term - and they have vast financial resources available to prevent this from happening.

It is important to remember that the common currency's immediate collapse remains a tail risk - possible, but very, very unlikely.

Investors and businesses should seek to harness the opportunities that fearful markets are creating, by hedging against the most probable risks - and using short-term volatility to enter positions more efficiently.

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