European markets fluctuated on Monday after fresh anxiety that Greece could exit the eurozone.
Tuesday, January 6, 2015
Additionally, the euro dropped to a nine-year low against the US dollar – reaching $1.1861 for the first time since March 2006.
While analysts’ negative expectations for an election in late January drove the euro lower, some believed the currency is better off lower. ECB President Mario Draghi once cited the euro as a weight on inflation and suggested that a weaker euro could free the export economy and lift inflation.
While the recent outlook on the euro has been negative, economists expect the currency to recover to above $1.20 within a short time.
Greek exit could spark chain reaction
According to some investors, a Greek exit from the eurozone is a distinct possibility and it would be a worst-case scenario, reported Bloomberg. Greece itself would likely be bypassed by international markets and its economy would skid toward contraction.
Meanwhile, the eurozone could face a similar situation as in 2011 and 2012 when Portugal, Cyprus, Spain and Ireland each received bailouts. In 2012, Mario Draghi promised to keep the euro intact by any means necessary – this latest threat of Greek exit will test his resolve.
“It would be a nasty precedent if Greece leaves as it could stimulate others to do the same, making it the first step of euro fragmentation,” Carsten Brzeski, chief economist at ING-DiBa in Frankfurt, told Bloomberg. “The fact remains that losing one member of the family would ultimately open Pandora’s box.”
All of that said, there is no guarantee that the upcoming Greek elections will lead to an exodus. Politicians like German Chancellor Angela Merkel have stated that any Greek exit would be manageable – possibly a tactic to dissuade Greek voters from voting for the party that favors fragmentation.
Nevertheless, if Greece were to leave the eurozone it could become a contagion that would soon spread to nations like Italy and Cyprus.
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