On the wave of recessions: how a record depreciation of the euro could threaten the EU economy

For three days in a row, the European currency on the world market has been trading cheaper than the American one.

So, on Wednesday, August 24, on the world market for €1 they gave $0.99.

Thus, the euro is at its lowest level against the dollar over the past 20 years.

Since the end of January, the European currency has fallen in price against the US by almost 14%.

The observed dynamics is largely due to the worsening situation in the European economy, says Alexander Potapin, an analyst at Finam Group.

“Uncertainty about EU energy security and gas flows to the largest economies in the region, in particular Germany, does not give investors reasons to be positive.

The problem of energy supply is acute in the EU, since the supply of gas and oil from Russia, in fact, stopped after the introduction of sanctions restrictions, ”the expert emphasized.

Recall that since the end of winter, the European Union, the United States and some other countries continue to impose new economic sanctions against Russia.

This is how the West reacts to the conduct of a military special operation in Ukraine.

In total, almost 11.8 thousand restrictions have already been imposed on Moscow (9.1 thousand of them since February 22), according to the materials of the global sanctions tracking database Castellum.AI.

The restrictions affected the banking industry, the energy sector, aviation and trade.

Also, almost half of Russia's gold and foreign exchange reserves (worth $300 billion) were frozen, and some transnational companies announced their withdrawal from the Russian Federation.

Since the beginning of March, inflation in the euro area has accelerated to 8.9% in annual terms.

The value became the maximum for the entire time of observation.

In a number of countries in the region, in particular in Estonia, Latvia and Lithuania, the increase in prices for goods and services exceeded 20%, according to Eurostat data.

At the same time, the cost of energy resources is at historically high levels.

Thus, gas prices in Europe have exceeded $3,000 per 1,000 cubic meters.

m. In such circumstances, some European companies are forced to reduce the production of goods in order to reduce fuel costs.  

The European authorities called the current situation difficult and urged to prepare for the consequences of the crisis.

French President Emmanuel Macron has already said that the region is undergoing great upheaval, and the "period of abundance" is over.

“We will have to face the economic consequences.

We are talking about products and technologies that seemed always available to us,” Macron emphasized during the first ministerial meeting after the summer break.

According to Morgan Stanley experts, the probability of a recession by the end of the year in a number of EU countries exceeds 50%.

In many ways, this state of affairs is due to the geographical proximity and involvement of the European Union in the crisis around Ukraine, Dmitry Babin, an expert on the stock market at BCS World of Investments, believes.

“Europe is closer to the conflict than, for example, the United States, and therefore the region's economy suffers more than the American one.

Geopolitical tensions are pushing investors away from euro-denominated assets, so in the medium term we may well see the European currency at $0.8-0.85 per euro, ”RT’s interlocutor does not exclude.

According to analysts, earlier the Russian market was one of the key markets for the sale of European goods.

At the same time, the rupture of economic ties with Moscow and the simultaneous reduction in the supply of energy resources from the Russian Federation led to a serious weakening of the business climate in the European region.

According to S&P Global, the PMI for the euro area in manufacturing and services has been below the critical level of 50 for the second month in a row, which indicates a contraction in the economy.

“In addition, there is concern about the excessive money supply in the EU financial system.

In an attempt to support the economy during the pandemic, the European regulator turned on the paper machine and printed twice as much money in relation to the EU economy than the Fed in relation to the US economy.

This state of affairs further undermines the confidence of market players in the euro,” Babin added.

Up game

The growing difference between interest rates in the European Union and the United States also plays in favor of the depreciation of the European currency.

This opinion was expressed in an interview with RT by Oleg Syrovatkin, a leading analyst at the global research department of Otkritie Investments.

According to the expert, against this background, investments in the dollar are becoming more attractive for investors compared to the euro.

“The US Federal Reserve is in a better position because it started tightening monetary policy earlier.

This provoked a massive strengthening of the dollar, which in itself helps the US regulator fight inflation.

On the contrary, the depreciation of the euro complicates the situation for the European Central Bank,” the specialist noted.

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In July, the Board of Governors of the European Central Bank (ECB) raised interest rates for the first time in 11 years, from 0 to 0.5% per annum.

The ECB explained this decision by the need to curb the rise in consumer prices.

At the same time, the growth of the indicator leads to an increase in the cost of loans for businesses, which further weakens economic activity in the eurozone.

“The ECB, like the Fed, will have to keep raising rates to fight inflation while trying to avoid a hard landing in the economy.

However, the ECB is in a more difficult position, since Europe, unlike the US, is not self-sufficient in energy.

Therefore, the ECB may act less decisively than the Fed,” Syrovatkin added.

However, the EU could get out of the economic crisis in the event of a partial easing of sanctions against Russia, experts admit.

Earlier, the European Union has already withdrawn from sanctions transactions for the payment of Russian oil supplies to third countries.

Also, members of the association eased restrictions on food exports from Russia.

First of all, Europe is faced with the task not to ease the pressure on Russia, but to make the restrictions less painful for its own business and the local population.

This was told to RT by a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers Alexander Razuvaev.

“It is possible that in some industries the EU will continue to ease restrictions in manual mode.

But in order to quickly solve the problem of cost-push inflation, which is killing European production, the EU needs to largely unfreeze our reserves, lift sanctions and ask us to take similar retaliatory steps, ”the expert concluded.