If there is indeed a de facto reverse currency war today, in which every central bank tries or is forced to recover its currency, then Europe with the euro is currently on the losing side. The European currency, common to 19 countries and more than 300 million people, fell this week to a low of almost 20 years against the dollar, where it almost equaled it. Compared to the determined steps of the American “Fed” and the Swiss central bank, for example, the European Central Bank did not take a single tangible step.
The main reason for the sharp decline in the value of the euro, having already reached a peak of $ 1.5 in the past, is the fear of an impending recession. The war in Ukraine, the consequences of sanctions on Russia, and Moscow’s response to them – are shaking the entire European economy. The price of critical gas for German production, and energy prices in general, soared six to six times, evading the competitive advantage that made Germany a leading global exporter. For the first time in 30 years, Germany recorded a trade deficit in May. Where the big economy on the continent is going, the whole bloc is going. The escape to the dollar, which is taking place these days of economic uncertainty, is also hurting the European currency.
What deepens the declines and the gloomy forecasts is the fact that there does not seem to be a solution to the energy crisis. Even if the war in Ukraine fades, the era of cheap Russian energy is nearing an end.
The top 600 stocks fell 18 percent this year
Not only is the euro falling, but also the index Dax , In which Germany’s top stocks hit an annual low this week. Europe’s leading stock index, Stokes 600 Has fallen by 18% since the beginning of the year.
Another reason for the weakness of the single currency involves the “tied hands” of the European Central Bank (ECB) in its attempt to cope with the recession alongside high inflation. These are added to the unique situation of the euro, in which a currency is common to 19 economies with different interests, different debt rates and other basic conditions.
View more for all articles
So far, the European Central Bank has been sitting idly by, while the Bank of England has already made five consecutive interest rate hikes, now standing at 1.25%, the US Federal Reserve has made three consecutive interest rate hikes, now standing at 1.75%, and two interest rate hikes have been recorded in Israel. In contrast, the European Central Bank has not yet raised a single interest rate, which still stands at minus 0.5%. Its Board of Governors, which has announced a gradual approach, is expected to announce a first rate hike in a decade only at its next meeting, on July 21.
To stabilize the currency and fight inflation, the bank is required to raise interest rates sharply. On the one hand, it should abandon the gradual approach, raising it by 0.5% in July. On the other hand, raising such interest rates into an economy that is on the verge of recession will further exacerbate economic pain, and the risk of bankruptcy and dismissal.
In the case of the EU, there is another critical and threatening angle – the real risk of a new debt crisis. If interest rates rise, countries like Italy and Greece, whose debt rates are astronomical, will find it difficult to meet the repayments of their government loans.
The markets are already examining the eurozone’s commitment to maintaining unity. The reason Italy can lend money is because the European Central Bank is the only one buying its debt. If the price of this activity skyrockets, it is not certain that there will be political political determination to do so. This is why the European Central Bank promises the markets a “new financial tool” that will keep the borrowing costs of southern European countries low, while preventing the flooding of the entire eurozone with cheap money.
Analysts’ opinions indicate that most signs are for a further decline in the currency. “The euro will fall further. We think equality is the minimum scenario,” a analyst at Nomura estimated. Citibank said equality is a “matter of time.” The Bloomberg agency reported that the euro’s proximity to the dollar equals “inviting shorts”. Some analysts have estimated that the euro will reach $ 0.95 in the coming months.
The European Bank has found where to draw optimism from
However, there is also a positive point for the European Bank, which is that the weakening is particularly strong against the dollar – and less so against other trading partners of the eurozone. The Bank’s economists take into account not only the exchange rate against the currencies, but also a weighted index that examines the exchange rate against actual imports from different countries.
According to this index, the euro has fallen by only 3% in the last six months. Still, a further decline in the value of the currency will work to further raise inflation in the eurozone, due to rising prices, a scenario warned by the French central bank governor. The European Central Bank, and the entire continent, may find themselves helpless in the face of a state of stagnation that this situation will lead to.