EUR/USD: This Could Be a Big Problem for the Euro to Dollar Exchange Rate

GrexitAlready suffering from a shaky economic situation, the euro to dollar exchange is under pressure from Greece again. Athens is at risk of dropping the euro—again. This time, though, the trigger is the Syrian refugee issue. As noted by the Eurasia Group, the agreement between the EU and Turkey does little to slow the influx of migrants from entering Greece. (Source: “THIS is what could push Greece out of the euro,” CNBC, February 8, 2016.)

The failure of the EU-Turkey agreement on refugee quotas hints that the Greece-Macedonia and the Greece-Bulgaria borders might close. This is what Germany demands. The effects will be to put more pressure on ending the Schengen open borders agreement. It could also revive anti-eurozone sentiments in Greece, pushing the EUR/USD lower.

Greece fears that it has become the seam keeping the EU’s burden contained. This would turn the country into a kind of European reception center to prevent refugees from reaching the Balkan area. Recall that in January 2015, approximately one million migrants arrived in Greece. Athens feels that European leaders are not helping Greece as it faces huge social, economic, and political challenges.

The risks of Greece leaving the EU are high. Should the migrant situation worsen, as spring and summer approach, the political situation will worsen. At first, the crisis will renew negotiations. But later, the negotiations will raise the uncertainties over reforms. Greece will be left vulnerable to a heavy risk of destabilization. In such a scenario, the EUR/USD would suffer the fallout.

If the migrants don’t succeed in forcing a EUR/USD drop, the “Grexit” risk will not go away. The Greek government might fail to overcome the social and political liabilities of its planned pension and bank loan reforms. Prime Minister Alexis Tsipras cannot delay applying the unpopular measures. Without these, the “Troika” (the ECB, EU Commission, and International Monetary Fund) will refuse the third bailout package that Greece urgently needs.

The Athens Stock Exchange’s (Athex) bearish sentiment betrays the EU’s concerns. The Athex fell more than six percent on Monday, weighed down by banking stocks, which tumbled more than 19%. The market is weakening amid the turbulence that the leftist government has to face. It has to choose between moderating social unrest and following the rigorous prescription of the Troika.

For the time being, Athens has chosen to buy time rather than choosing between one of the unpleasant options. At play is the new €86-billion (US$90.0-billion) plan that Greece and the EU reached last July. It does not end there. Greek farmers have blocked major roads to protest against the new tax regime. It provides for fewer fiscal exemptions and tax increases. Self-employed and civil servants have joined them, opposing cuts to pensions.

Tsipras still has one redeeming move to quell pressure for a Grexit, thus saving the euro and the EUR/USD, even if only temporarily. Tsipras could play the migrant card in exchange for a cut of the Greek debt. This is still in the realm of possibility rather than probability. But, as Eurasia Group warns, the situation in Greece is explosive for the eurozone. Greece may find itself at the heart of fresh negotiations but this time, there is a real danger that it could leave the eurozone.

Europeans worry, especially the Germans…