How Much Pain Will Greece Be Willing To Bear?

Last updated 2/3/2010 3:38 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Today the European Commission is expected to endorse the latest proposals by Greek fiscal authorities to curb deficit spending including such measures as wage freeze for government workers, a boost in revenue and the reduction of EU share of the budget shortfall.

Greek Prime Minister George Papandreou pledged to raise fuel taxes and said an overhaul of the tax system  targeted at the wealthier taxpayers will boost 2011 revenue. He stated, “We are the weak link in the euro zone. We must act immediately and decisively.”

As of now it appears that Greek authorities are making a serious effort at reform, but the social costs of such moves could prove exceedingly painful if growth in the region does not accelerate. The combination of higher taxes and lower wages is unlikely to be tolerated by the populace for long and could result in massive political backlash, if it triggers a severe recession in the country.

EU authorities must walk a fine line between enforcing the proper fiscal discipline on Greece in order to ensure the credibility of the stability pact while at the same time avoiding the draconian measures that would radicalize the Greek populace and turn them against EU membership.

Although at present the resolution to the crisis depends  on political consensus, it’s ultimate success is contingent on economic growth. This dynamic applies not only to Greece but to other parts of Southern Europe as well, most particularly Spain where the unemployment rate is hovering near 20%. For that reason we believe the ECB will remain stationary far longer than the market expects, allowing the laggard economies in EU to reliquify and bring their fiscal affairs in order, before considering any monetary tightening.

Currency markets have generally taken the news in stride with risk flows improving throughout the Asian session as both Hong Kong and Shanghai rose more than 2% while     Nikkei climbed a more modest    32bp. Overall, however, the major remains constrained by very tight ranges with EUR/USD capped at  1.4000, as markets await the US ISM Non-Manufacturing data at 15:00 GMT which could propel risk flows higher if it produces an upside surprise.

Comments (5)

hsbc

February 03, 2010 at 04:11 AM ET

go greece go

Liverpinguin

February 03, 2010 at 04:25 AM ET

"most particularly Spain where the unemployment rate is hovering near 20% ", the situation is really bad in Spain however that rate is not real there are a huge amount of underground economy specially after the Crisis, they are talking about 25% of the unemploment is actually working just not paying taxes to a horrible goverment.

bschlossberg

February 03, 2010 at 05:27 AM ET

Thanks for the input that explains why they are not in a Depression

silver

February 03, 2010 at 01:40 PM ET

Is EUR/GBP forming another gartley pattern?

silver

February 03, 2010 at 01:50 PM ET

Actually I think EUR/GBP is forming the butterfly pattern do you expect is to decline from this pattern?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.