EU Playing Nice… But For How Long?

In last week’s European Union summit, European leaders unveiled the key goals of their 10-year economic plan targeted to spur further growth in the region. Although the nitty-gritty details are still fuzzy, they decided on measures to raise employment and boost research and development spending to 3% of euro zone’s GDP.

Aside from that, ECB President Jean-Claude Trichet reiterated the importance of price stability in the region. He said that it would be a “serious mistake” to aim for higher inflation since this would undermine the effectiveness of the central bank’s monetary policy. Instead, individual nations should be more focused on maintaining their fiscal stability.

Speaking of fiscal responsibilities, Greece’s debt problems hogged the spotlight once again, as euro zone leaders finally came to an agreement for a solution to Greece’s debt problems. According to the arrangement, euro zone leaders, particularly France and Germany, together with the International Monetary Fund, will provide a €20 billion aid package in case Greece decides to dial 911.

There are strict rules to the bailout package though. For one, the intervention may be done ONLY when there is no other solution present. Secondly, and probably more importantly, a unanimous agreement between euro zone states is needed to activate the plan, giving Germany power to veto the decision if it pleases.

Hmmm, it’s quite scary when you think about it… In the not-so-distant past, Germany showed extreme reluctance in extending a helping hand, implying that Greece should be punished for not abiding by the euro zone’s budget deficit rules.

Still, Trichet and other top officials in the EU think that Greece, with some pressure from its neighboring countries, can stand on its own two feet. Recently, Greece slashed its January-to-February budget deficit by an outstanding 77% by boosting its tax revenues by 13.2% and cutting its spending by 9.6%. The only question now is: Can the Greek government sustain its tax gains and budget cuts in the coming months?

Keep in mind that the Greek government still needs to raise €53 billion more, which includes a maturity payment of about €20 billion in April and May. If they can’t raise this amount domestically, they may have to run to the IMF and other EU nations for help. In the meantime, the other EU-member nations will be keeping a close watch on Greece’s fiscal position.

Remember also that during the fourth quarter of 2009, Greece’s economy shrunk by 0.8%. With its hands tied behind its back and €20 billion worth of dues in April and May, jump starting the economy through government spending is out of the equation. Given this, we may see the Greek economy struggle to paddle its way out of the recession.

Taking a look at Big Pippin’s chart art today, we can see that the EURUSD broke through some key support at 1.3450 last week, hit a new 2010 low at 1.3270 before rising back up on Friday. It seems that announcement of the bailout plan was just what the markets were waiting for before buying back up the euro. With risk sentiment propped up, we may see the euro continue to gain in the short term, as investors cover their former short positions when they weren’t quite sure what was going to happen to Greece.

The skeptic in me still sees that the euro zone is full of potential pot holes and speed bumps down the road. Last week, Portugal got hit with a credit downgrade from Fitch. Will the rest of the PIIGS (Ireland, Italy and Spain) cause the euro zone to swerve in and out of its path to recovery? If we see more problems resurface, it may cause the euro to end up in a ditch again sometime down the line.