Macroscope | Ukraine war, energy crisis and Italy’s political turmoil call euro’s survival into question

A worsening European energy crisis could raise the risk of a recession while the gap between the US and European central banks’ monetary policy will put downward pressure on the euro

Big euro currency investors like China should consider cutting their losses and hedging their bets

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European Central Bank president Christine Lagarde attends a news conference following a monetary policy meeting, in Frankfurt, Germany, on July 21. Photo: Reuters

Published: 3:30am, 26 Jul 2022

Who would blame anyone for thinking that Europe is finished? Russian President Vladimir Putin might have achieved his aim to crack European unity, with the economy suffering on a number of fronts.

The war in Ukraine, the energy crisis and political turmoil in Italy are throwing the European Union into chaos and it’s no surprise that the euro is in deep trouble. The recent test below parity for the euro against the US dollar is the least of its problems and could mark the first step towards the November 2000 all-time low of 0.8225 euro-dollar being tested again.

Europe’s leaders seem in disarray, the European Central Bank (ECB) is tightening interest rates for the first time in more than a decade and financial stability is at risk. The questions investors should be asking are how low can the euro go, and whether it can even survive.

Big euro currency investors like China should consider cutting their losses and hedging their euro bets in the global currency markets. In the present turmoil, the US dollar has only one way to go and that’s up.

Winter will be a major test for Europe’s economy, which could easily slip into recession if the energy supply crisis is not resolved soon. The risk of energy rationing for industry, and its impact on inflation and employment throughout Europe, comes at the worst possible time as the European economy is still struggling to get back on its feet after over two years of the Covid-19 pandemic, global supply-chain shortages and vulnerable economic confidence.

German industry is already feeling the pinch with the bellwether IFO business confidence indicator showing the strain over the past few months as the spectre of gas shortages deepens industry’s concerns about disruption to future output and growth. The business climate index has fallen from a peak of 101.4 in June 2021 to a low of 90.8 in March and sentiment is still struggling.

Macroscope | Ukraine war, energy crisis and Italy’s political turmoil call euro’s survival into question

A worsening European energy crisis could raise the risk of a recession while the gap between the US and European central banks’ monetary policy will put downward pressure on the euro Big euro currency investors like China should consider cutting their losses and hedging their bets

A worsening European energy crisis could raise the risk of a recession while the gap between the US and European central banks’ monetary policy will put downward pressure on the euro

Big euro currency investors like China should consider cutting their losses and hedging their bets