Christopher Vecchio, Currency Analyst, at DailyFX, comments:
“The lust around the announced agreement between Greece and her creditors has already started to wear off. EURUSD is back under $1.1100, after flirting with a break of $1.1200 on the initial reaction to the agreement. Developments on the charts suggest that markets are weary about the deal’s ability to help Greece right the course, and perhaps are rightly discounting the possibility that ‘this solution’ is the one that ends the cycle of mini-crises in the Euro-Zone.
“The heart of the issue in the Euro-Zone right now is that there isn’t a ‘federal level’ fiscal transfers system as constructed in the United States; the Euro-Zone isn’t a fiscal union. In the United States, when a state runs a deficit (like Mississippi or West Virginia), there is an automatic rebalancing with excess funds collected from surplus states (like New York or Minnesota). This is useful for situations like rising unemployment, when the government has to make additional outlays for things like unemployment benefits. The net-effect is a more integrated economy across states, with more homogenous rates of growth and inflation.
“On the other hand, in the Euro-Zone, these automatic stabilizers don’t exist. When a deficit country (like Greece) goes into a crisis, it must make political concessions to surplus countries (like Germany) in order to receive aid funds. This makes for a contentious process, ultimately creating an imbalance of power skewed towards the surplus countries. We’re seeing this now, with Germany essentially holding all the chips at Greece’s expense.
“While a fiscal union is still further down the road (if at all, ever; Germany doesn’t like the idea in the very near-term), the current proposals agreed upon by the Greek government and the Eurogroup should be enough to cool talk about a ‘Grexit,’ prevent the collapse of the Greek banking system, and afford Greece bride financing to pay its litany of repayments the next few weeks.
“Over the long-term, without a fiscal union in place (or efforts to move towards that integration), these types of budget crises are bound to come up in the future given the heterogeneity of economies across the Euro-Zone. Any solution given to Greece in the short-term would be like bringing a car to the mechanic and only getting the fluids and tires changed when in reality the entire transmission needs to replaced. Germany may have to compromise on a few of its fiscal ideologies if the notion of European integration is to move past the current crisis and survive in the future.”