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Euro Exchange Rate News: How Could the Euro (EUR) be Affected by A ‘Grexit’?

Euro (EUR) Exchange Rate News: How Will The Euro Be Affected by A Greek Tragedy?

The Euro (EUR) exchange rate has once again come under pressure from concerns over the situation in Greece as Athens runs out of funds; the prospect of a ‘Grexit’ now seems more likely than ever.

Some economists have recently stated that if Greece runs out of funds and leaves the Euro that it might be a good thing for the currency bloc as a whole, but what about the Greek people caught up in their tragedy? Sure, the Euro may survive, but it will be greatly diminished.

The sense of invulnerability once espoused by the European Union would collapse overnight, and doubts over its viability would more than likely increase across the world. In effect, a Greek exit would seriously harm confidence in the European project as a whole. If one nation leaves, others can follow.

There are several obstacles facing Greece next week. First, the Athens based government must draw together a list of economic reforms, which must then be ratified by its creditors in the EU. Then, it must legislate to lock in the agreed changes. Both tasks will be difficult as the EU is unlikely to back down on insisting that austerity measures must remain in place.

‘Euro area finance ministers are probably at the end of their tether, after ten weeks of the new government’s foot dragging and game-playing, any sympathy for the Greek position has long disappeared,’ said the economic research team from Daiwa.

Syriza, the party that leads the Greek government, was voted into power on the promise that it would end such measures, which leads us onto the second problem. If the government tries to force austerity measures through parliament, it will lose the support people. Such a move would be seen as a betrayal. New elections could be called, creating unneeded political instability in a nation, which is already teetering on the edge of the abyss.

Odds of a ‘Grexit’ Now 50-50

Athens also has debts to repay. It repaid a €450m (£326m) loan from the International Monetary Fund (IMF) on Thursday, but has another, larger payment of €763m to pay on 12 May, and, unless it can secure the €7.2bn in funding from the EU by delivering reforms, is not expected to be able to pay up. As well as having to pay back the IMF, Athens will also need to find €2.4 billion by April 17 in order to pay off its bills.

Former US Reserve Chairman Alan Greenspan thinks that if Greece is forced to leave the Eurozone, the single currency will collapse shortly after. Other economists however, such as David Kotok, the chairman and chief advisor from Cumberland Advisors Inc. believes that the Eurozone is not only strong enough to withstand a ‘Grexit’, but will be better off without the nation being a member. If the Eurozone does survive a Greek exit, new applicants waiting to join the currency will likely have to wait, as the EU will be in no position to expose itself to more risk.

Other Euro members such as Ireland, Portugal, Cyprus, Spain and Italy will come under scrutiny from investors worried over their economies. As their perceived risk factor is raised, those nations will suffer from higher borrowing costs.

‘There is a meaningful risk that other countries would join Greece in leaving the Euro. The Euro is patently not an optimal currency union at the moment, which gives economic momentum to the idea of a broader fragmentation,’ said the UBS Group.

Euro (EUR) Exchange Rate Forecast To Remain Under Pressure Next Week

The worst-case scenario would be that any fallout caused by a Greek exit would not be contained to the Eurozone. With Europe contributing to a fifth of total global trade, the fallout could spread across the globe, with the potential of sending the world back into a recession.

All of this is pure speculation however, but one thing is clear. Until Greece’s fate in the Eurozone is decided, sentiment towards the Euro will remain under pressure.

Relations between Greece and Germany remain tense as Athens continues to persist on claiming reparations for the Nazi occupation of World War Two.

Tensions between Athens and the EU will likely be heightened further next week if EU members push for accession talks with Former Yugoslav Republic of Macedonia (FYROM) to begin regardless of the country’s ongoing negotiations with Greece to settle the name dispute.

Next week’s ECB policy meeting press conference could offer further indication as to the ECB’s stance on the Greek situation.