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Macroscope | Why Germany’s energy crisis and euro weakness spell trouble for the euro zone
- Germany has long been the engine of European growth and the German model rests on trade surpluses and factories powered by Russian energy
- With electricity prices going through the roof and euro weakness making imported energy more expensive, the situation in Germany is alarming
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Think of a major economy facing big challenges, an economy that is globally significant and regionally critical, with a historically strong export sector. One that is heavily reliant on imported energy and is currently stricken by drought. You guessed it: Germany.
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The euro, the currency of the zone in which Germany is the dominant economy, has been on a weakening trajectory against the US dollar for much of 2022 and was trading around parity with it last week.
In fairness, and this is also evidenced in a degree of Chinese yuan depreciation versus the US dollar, much of the euro’s slide is due to general dollar strength, derived from the quickening pace of Federal Reserve interest rate hikes since March.
Mind you, the European Central Bank’s measured (some might even say dilatory) approach to tightening monetary policy, despite evidence of rising consumer price inflation in the euro zone, has hardly bolstered the attractiveness of the currency on foreign exchanges.
While the Fede has hiked US interest rates by 225 basis points this year to a target range of 2.25-2.50 per cent, with more increases in the offing, the ECB has so far only increased its own benchmark rate, which was in negative territory, by 50 basis points, to 0 per cent.
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In the US, annualised consumer price inflation stood at 8.5 per cent in July and in the euro area, the figure was 8.9 per cent – in stark contrast to China’s year-on-year figure of 2.7 per cent for the same month.
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