Daily Management Review

Will strong euro really benefit the European economy?


08/01/2017


The euro rate in recent weeks has grown significantly. In relation to the US currency, the European currency reached its highest level from the beginning of 2015 at a low of 1.17, which is ten cents more than in April.



pixabay
pixabay
Exactly five years ago, on July 26, 2012, ECB President Mario Draghi announced to London bankers that he would do "whatever it takes" in order to keep the euro. 

However, this is still a big question whether Draghi is considering the latest appreciation of the euro as a suitable gift for the jubilee. For the medium term, this will affect growth of the economy of Germany and Europe and will put the ECB in a difficult position. In the end, the European Central Bank could react in such a way as to further delay normalization of income from capital - and thereby keep the percentage stagnation in savings accounts even longer.

At the same time, the reason for such development in the foreign exchange market is quite favorable. "Recovery of the euro resulted from economic and political stabilization of the Eurozone," said Alwin Schenk, investment manager at Sal. Oppenheim. For the euro, the crisis seems to be a thing of the past, and the economy in all of Europe is gaining momentum again.

IMF again states strong growth in Europe

The last sign of this was the newly grown Ifo index, which was published on Tuesday. It measures mood of the German economy. Although most observers have assumed that it has recently clouded somewhat, a new record level has been reached.

But other regions of the euro zone are catching up. On Monday, economists of the International Monetary Fund (IMF) raised the growth forecast for various countries of the Eurozone, especially for such heavyweights as France, Germany, Italy and Spain. And they even see a chance of further improvement.

This success story occurs simultaneously with destabilization in the United States and Great Britain, believe Alvin Schenk. Failed reforms in the US and the upcoming Brexit put pressure on economic development. Therefore, IMF experts lowered the growth forecast for both countries.

The difference in percentage of capital between the US and Germany is declining

This economic development resulted from convergence of interest rates in the capital market on both sides of the Atlantic, compared with the difference in income for ten-year German government loans, on the one hand, and the corresponding US securities, on the other. Back in December, this difference reached the highest level after reunification of Germany and was more than 2.3 percentage points.

Meanwhile, this difference was still reduced to 1.75 percentage points, which is the most decisive for the euro. Over the past few months, the figure has declined, so the euro has soared since large investors prefer to give their money to where they will receive more interest. The greater the percentage difference, the stronger this trend; the smaller it is, the less pressure.

However, over the past weeks, one more parallel development could be observed: the stronger the euro became, the greater the pressure was placed on stock prices here in the country, because investors fear that European enterprises will suffer from a strong currency. First of all, export-oriented German firms can export less and thereby receive less profit. And this again affects the entire economy.

Strong euro oppresses economic growth

Daniele Antonucci, an economic expert at Morgan Stanley, believes that the continued growth of the euro by ten percent could lower the growth rate by about 0.7 percentage points in the next year. And since he believes that the euro in the first quarter of next year will even beat the mark at 1.20, he predicts a drop in growth in the euro area next year by about 0.6 percentage points. For Germany, this means a loss of about one-third of total growth.

But is it really $ 1.20 per euro real? In any case, most predictors in the foreign exchange market are studying these indicators. Their opinions differ, perhaps, in the question of when this will happen. For example, Kit Juckes from Société Générale believes this figure will decrease even before the ECB's next meeting in September. And this will then have certain consequences.

Such a rapid strengthening of the euro is not in the interest of European bankers. Ultimately, this threatens the economic take-off, which in previous years has been achieved with such difficulty, not least because of the policy of zero percent.

source: welt.de






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