Single currency in crisis: The ECB is caught between a rock and a tough place ahead of crunch rates decision, says MAGGIE PAGANO
One in every of the few economists who has been calling a recession within the eurozone and euro/dollar parity since March is Robin Brooks, economist at the celebrated IIF within the US.
Brooks warned back then that Germany, the region’s biggest economy, can be badly walloped because Russia’s war on Ukraine would prove such a body blow.
And so it has come to pass. The euro has dived to a 20-year low against the dollar, breaching parity for the second time this 12 months as recession across the eurozone looks unavoidable.
Slump: The euro has dived to a 20-year low against the dollar, breaching parity for the second time this 12 months as recession across the eurozone looks unavoidable
As Brooks also notes, it’s no surprise that the euro has collapsed against the dollar due to the damage sky-high energy prices have done to the region.
The more surprising fact is that the euro has not fallen faster considering the eurozone has a trade deficit. Now he predicts the euro has further to fall.
The most recent S&P Global Eurozone PMI adds to his prognosis. The index dropped to 49.2 in August, from 49.9 in July, the second successive drop in business activity and a sharper fall than that seen in July.
For the primary time, France can be contracting, all the way down to 49.8 from 51.7 in July. Although the UK’s index got here in at 50.9 points in August, it’s still lower than July’s 52.1 and stepping into the mistaken direction.
Germany saw the largest fall, with the flash PMI index sliding to 47.6 in August from 48.1 in July, with each the services and manufacturing output below 50, the bottom for 2 years.
The outlook gets worse. Overnight on Monday, benchmark gas prices within the European Union rose 13 per cent to a record peak on the news that Russia’s Gazprom – surprise, surprise – is carrying out unscheduled maintenance on Nord Stream 1, its principal pipeline into Germany.
Gas prices have doubled within the last month to be 14 times higher than the typical price of the past decade. Consider that fact slowly.
All of the eurozone countries have been hurt but Germany has suffered probably the most. Gas provides 1 / 4 of its energy needs.
Making matters worse, Germany has also suffered extreme drought resulting in low water levels within the Rhine, making it difficult to move goods in a foreign country.
A number of the euro’s weakness could be attributed to the dollar’s strength driven by the Federal Reserve’s offensive on higher rates of interest.
Besides, Christine Lagarde and the European Central Bank are in dangerous territory as they consider whether to be hawkish with more aggressive rate of interest hikes after they meet next on September 8.
There could also be hints about future policy over the subsequent few days from the Bundesbank chief Joachim Nagel when he meets fellow central bankers on the Fed’s Jackson Hole Economic Symposium tomorrow.
Deciding what to do next can be tricky. The ECB is caught between a rock and a tough place. Raising rates may do more harm than good and tip the region right into a deeper recession.
Lagarde will need to return up along with her version of Mario Draghi’s famous ‘Whatever It Takes’ to avert one other eurozone crisis and stop the euro falling further.
And she will be able to’t even blame Brexit.
Right call at BT?
French billionaire Patrick Drahi likes great art. In addition to buying Sotheby’s, he has his own collection of paintings by Picasso and Matisse.
Drahi also has a pointy eye for investments, having gathered an 18pc stake in BT, not quite a masterpiece but essential to the nation’s communications network.
The Government was concerned enough by his stake – Drahi likes to bid for under-priced assets with a great deal of debt – that it investigated him under the brand new National Security and Investment Act.
But now he has been given the green light by ministers who claim he doesn’t pose a security risk. Drahi is claimed to be friendly towards BT so it’s unlikely that he’s the one who would launch a takeover bid.
But anyone who does desire a flutter, will want his shareholding. Let’s hope ministers have done enough homework to see behind his Altice canvas.
After Calypso and Aphrodite comes Cronos. Cyprus has just made its third big natural gas discovery off the coast on the Cronos-1 well.
The energy ministry says it’s working with France’s Total and Eni to get the gas out of the waters as quickly as possible to spice up European energy security. You bet they’re.