How The European Energy Crisis Is Affecting The Euro
Updated
The euro-dollar exchange rate captures the value of the euro in terms of U.S. dollars. It’s one of the most widely tracked and significant global currency indicators, given that Europe is a major economic region with a strong currency, and many international financial transactions are denominated in euros. Moreover, the euro has been under pressure in recent months because of renewed concerns about European debt and fears that the European Central Bank may curtail its massive stimulus program too early (Injecting Billions of Euros into Eurozone debt - pandemic-era bond-buying program), which would make it harder for countries like Italy to service their debt. With all this in mind, let’s take a look at why the Euro Declined Against the US Dollar and hit a 20 Year Low recently.
The European Energy Crisis
Energy is a critical aspect of any economic outlook. As such, it is no surprise that Europe’s energy crisis has exacerbated its economic problems. Europe currently relies on Russia for approximately 50% of its natural gas. Europe’s heavy reliance on Russian gas is a major source of tension between the EU and Russia. The EU has placed sanctions on Russian energy firms, making it difficult for them to acquire equipment and technology they need to develop their energy infrastructure. That has left Europe with few viable options for alternative suppliers.
Effects of EU Sanctions against Russian
The EU’s Largest Member States Are Suffering
The most significant economic problems can be found in Europe’s largest economies: Italy, France, Germany, and Spain. And those four economies are suffering because of the energy crisis, a weak euro, Brexit, and rising interest rates. The euro has been trading at a relatively low level against the U.S. dollar for years. However, the euro’s weakness has recently accelerated, as the European Central Bank adopted a more hawkish tone. That has made it more expensive for other countries to buy euros. Ergo, pushing up borrowing costs for euro-zone countries that are heavily indebted like Italy, France, and Spain. It has also made it more expensive for the European Union’s most powerful economies to service their debt.
Political Instability
It’s important to mention political instability because it has been an ongoing issue in Europe for years, particularly in countries like Italy, France, and Germany. That’s led to significant political uncertainty that has kept investors away and made it more difficult for these countries to get the strong economic growth they need to deal with their debt problems. The United Kingdom has been a major trading partner with the EU, The political environment surrounding the Brexit has led to significant economic uncertainty.
Eurozone Growth Is Stagnant
One of the most important economic metrics is GDP growth, which is the rate at which an economy is producing goods and services. Eurozone GDP growth has been relatively low for years, and it recently fell to a 17-year low. That’s largely due to lack of investment in major economies like France, Germany, and Italy, which are the most significant contributors to the eurozone’s GDP. When the energy crisis hit the EU, businesses stopped investing in plant and equipment necessary for growth. As a result, GDP shrank throughout the region. That’s forced the European Central Bank to take strong action, including negative interest rates and quantitative easing. However, those policies have had only limited success, as Europe is still facing an investment drought.
European Union Debt Crisis
The EU debt crisis emerged in 2010 when major economies like Italy, Spain, and Greece racked up unsustainable debt loads. Although it has faded in recent years, it remains a major issue, particularly for Italy and Spain. That’s because the two countries have large debt loads, and they are suffering from slower growth, making it harder to service that debt. That’s created significant economic uncertainty, as investors have been reluctant to lend to these countries. The European Central Bank has stepped in, making it easier for these countries to borrow, including buying their debt. However, the ECB’s actions have also made it easier for other EU countries to borrow, which has contributed to the rise in interest rates that are hurting France and Germany.
ECB Tapering
As the energy crisis worsened and economic growth was weak throughout the European Union, the European Central Bank boosted its monetary stimulus to stave off a deeper downturn. That included purchases of billions of euros of assets, including government bonds, per month. That quantitative easing program has been credited with helping Europe’s major economies, particularly Germany, avoid a full-blown economic crisis, as well as keeping the value of the euro low. That has also bolstered economic growth in other EU countries, like France and Italy, that rely on exports to Germany. However, with the energy crisis easing and economic growth gaining momentum, the ECB began to taper its QE program, reducing monthly purchases to just €30 billion. boosting the borrowing costs of the European Union’s larger economies.
Oil Price Impact
The energy crisis has also driven up the price of oil and other commodities. That has put additional pressure on the EU’s most significant economies, as their industries have been affected by higher prices. That’s particularly true for France and Italy, which have been among the hardest hit by the energy crisis and oil price surge. That’s made it more difficult for those economies to export goods and services, which has contributed to the stagnation of their GDP.
Conclusion
The European energy crisis has been a major problem for the EU. It has driven up the price of oil and gas, while making it more difficult for countries to import those resources. That has put the EU at an economic disadvantage when compared to other major regions, like the United States. That’s made it harder for the EU to recover from a variety of economic issues, including a low growth rate, high debt levels, and political instability. It remains to be seen if the EU can overcome its energy crisis and get back on track to economic prosperity.
EUROZONE INFLATION RATE
Important Upcoming Events that will cause volatility in the market
The European Energy Crisis
Energy is a critical aspect of any economic outlook. As such, it is no surprise that Europe’s energy crisis has exacerbated its economic problems. Europe currently relies on Russia for approximately 50% of its natural gas. Europe’s heavy reliance on Russian gas is a major source of tension between the EU and Russia. The EU has placed sanctions on Russian energy firms, making it difficult for them to acquire equipment and technology they need to develop their energy infrastructure. That has left Europe with few viable options for alternative suppliers.
Effects of EU Sanctions against Russian
The EU’s Largest Member States Are Suffering
The most significant economic problems can be found in Europe’s largest economies: Italy, France, Germany, and Spain. And those four economies are suffering because of the energy crisis, a weak euro, Brexit, and rising interest rates. The euro has been trading at a relatively low level against the U.S. dollar for years. However, the euro’s weakness has recently accelerated, as the European Central Bank adopted a more hawkish tone. That has made it more expensive for other countries to buy euros. Ergo, pushing up borrowing costs for euro-zone countries that are heavily indebted like Italy, France, and Spain. It has also made it more expensive for the European Union’s most powerful economies to service their debt.
Political Instability
It’s important to mention political instability because it has been an ongoing issue in Europe for years, particularly in countries like Italy, France, and Germany. That’s led to significant political uncertainty that has kept investors away and made it more difficult for these countries to get the strong economic growth they need to deal with their debt problems. The United Kingdom has been a major trading partner with the EU, The political environment surrounding the Brexit has led to significant economic uncertainty.
Eurozone Growth Is Stagnant
One of the most important economic metrics is GDP growth, which is the rate at which an economy is producing goods and services. Eurozone GDP growth has been relatively low for years, and it recently fell to a 17-year low. That’s largely due to lack of investment in major economies like France, Germany, and Italy, which are the most significant contributors to the eurozone’s GDP. When the energy crisis hit the EU, businesses stopped investing in plant and equipment necessary for growth. As a result, GDP shrank throughout the region. That’s forced the European Central Bank to take strong action, including negative interest rates and quantitative easing. However, those policies have had only limited success, as Europe is still facing an investment drought.
European Union Debt Crisis
The EU debt crisis emerged in 2010 when major economies like Italy, Spain, and Greece racked up unsustainable debt loads. Although it has faded in recent years, it remains a major issue, particularly for Italy and Spain. That’s because the two countries have large debt loads, and they are suffering from slower growth, making it harder to service that debt. That’s created significant economic uncertainty, as investors have been reluctant to lend to these countries. The European Central Bank has stepped in, making it easier for these countries to borrow, including buying their debt. However, the ECB’s actions have also made it easier for other EU countries to borrow, which has contributed to the rise in interest rates that are hurting France and Germany.
ECB Tapering
As the energy crisis worsened and economic growth was weak throughout the European Union, the European Central Bank boosted its monetary stimulus to stave off a deeper downturn. That included purchases of billions of euros of assets, including government bonds, per month. That quantitative easing program has been credited with helping Europe’s major economies, particularly Germany, avoid a full-blown economic crisis, as well as keeping the value of the euro low. That has also bolstered economic growth in other EU countries, like France and Italy, that rely on exports to Germany. However, with the energy crisis easing and economic growth gaining momentum, the ECB began to taper its QE program, reducing monthly purchases to just €30 billion. boosting the borrowing costs of the European Union’s larger economies.
Oil Price Impact
The energy crisis has also driven up the price of oil and other commodities. That has put additional pressure on the EU’s most significant economies, as their industries have been affected by higher prices. That’s particularly true for France and Italy, which have been among the hardest hit by the energy crisis and oil price surge. That’s made it more difficult for those economies to export goods and services, which has contributed to the stagnation of their GDP.
Conclusion
The European energy crisis has been a major problem for the EU. It has driven up the price of oil and gas, while making it more difficult for countries to import those resources. That has put the EU at an economic disadvantage when compared to other major regions, like the United States. That’s made it harder for the EU to recover from a variety of economic issues, including a low growth rate, high debt levels, and political instability. It remains to be seen if the EU can overcome its energy crisis and get back on track to economic prosperity.
EUROZONE INFLATION RATE
Important Upcoming Events that will cause volatility in the market
Note
EUROZONE Inflation Hits 9.1% in August,
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.