Rising energy prices have pushed the euro down to parity with the US dollar in recent days, while concerns over theenergy supply forced the European Commission to revise its growth forecasts significantly.
While the Commission maintains its GDP growth forecast of 2.7% for 2022, it now expects growth of just 1.5% in 2023, compared to a previous forecast of 2.3%.
“Russia’s war once morest Ukraine continues to cast a shadow over Europe and our economy. We face challenges on multiple fronts ranging from rising energy prices to a highly uncertain global outlook”said European Commission Executive Vice-President Valdis Dombrovskis.
The situation might get worse
The uncertainties surrounding the evolution of the war make it necessary to consider growth projections with caution.
“As the evolution of the war and the security of the gas supply are unknown, these forecasts are marked by high uncertainty and downside risks”, said EU Economics Commissioner Paolo Gentiloni.
These downside risks were also registered by the financial markets, as evidenced by the brief parity of the euro once morest the US dollar observed this week (July 13).
If the symbolism is more significant than the very substance of this parity, the magnitude of the euro’s fall remains significant and worrying: – 11.8% since the start of the year.
This fall is almost equivalent to the declines observed in 2015, the year when the European Central Bank (ECB) had to put in place significant stimulus measures.
Moreover, the fall in the value of the euro may not have reached its lowest point yet.
Will Moscow cut off gas supplies?
“We see the possibility of a move up to $0.97 and maybe even $0.95”said Olivier Konzeoue, head of the currency team at asset manager UBP, noting the implication of the energy crisis for the European economy.
“Basically, we know that everything revolves around Russia”he added.
The euro’s latest drop came following gas flows through Russia’s Nordstream 1 gas pipeline were halted for 10 days for maintenance work.
But if Moscow prolongs the shutdown, Germany — which has already begun the second phase of a three-tier gas contingency plan — might be forced to ration fuel.
“If the gas pipeline closed for 10 days does not reopen and we suffer more gas rationing, in this situation we may not have experienced the lowest levels of the euro”said Christian Keller, head of economic research at Barclays.
The European Union is also preparing for a drop in Russian gas supplies, evidenced by a leaked Commission document on which EURACTIV got his hands on it.
Thus, some analysts expect a drop to $0.90 if the gas supply is further disrupted.
An uncomfortable position for the ECB
These measures embarrass the ECB. It is expected to raise interest rates next week for the first time since 2011 to tackle record high inflation. The EU executive predicts that annual inflation for 2022 will reach 7.6% in the euro zone and 8.3% in the European Union.
The fragility of the currency exacerbates the problem of inflation. However, the ECB cannot risk a radical tightening of its policy, which would risk reducing economic growth.
The effects of soaring energy costs are already being felt. Germany has just declared its first trade deficit since 1991 and market sentiment has fallen below levels seen when the coronavirus pandemic began in 2020.
An analysis carried out by BNP Paribas on the performance of currencies in the event of energy price spikes shows that the euro is more affected than other developed country currencies by gas price shocks, with an average drop of 4 .5% in these periods.
JP Morgan noted that the euro zone is already facing outbreaks “parabolic” gas prices, as supplies fell 53% in June. Germany, a major industrial power, experienced a 60% drop in its supply.
It lowered its euro-dollar target to $0.95, “which shows that the market will be increasingly willing to price in an increased probability of upside”.
In the worst-case scenario, the euro-dollar might reach $0.90, according to JP Morgan, which cites the Bundesbank’s forecast of a 6% drop in German GDP in the first year in the event of a complete shutdown. supply.
Solidarity and independence
Jordan Rochester of Nomura believes the euro might fall to $0.95 by the end of August, but in a scenario where gas stocks are not replenished before winter, he might slide to $0.90.
Similarly, Citi analysts predict that a Russian supply shutdown will drive gas prices well above current levels of around 170 euros per megawatt hour.
The euro will fall to $0.98 if gas reaches 200 euros, while at 250 euros it would trade below $0.95, they explained to their clients.
Faced with the challenges ahead, European Commissioners Mr. Gentiloni and Mr. Dombrovskis called for solidarity and a reduction in the EU’s dependence on Russian fossil fuels.
