On Friday, the pressures experienced by the Euro during the rest of last week were extended. So where exactly is this weakness coming from? To answer that, we could look to a few structural factors that have been bubbling away for years and some new factors that have emerged more recently.
When the Eurozone was formed, it was not without its critics. In particular, criticism from groups within Germany were very vocal (and as the dominant and driving force within Europe’s economies, it is hardly surprising that this was the case) and among their criticisms was their assessment of the available monetary policy tools and how to balance these against the fiscal levers within each of the member nations. When Mario Draghi inherited his role as leader of the European Central Bank from Jean-Claude Trichet in 2011, much of his manifesto was centred around support of the single currency and protecting it at all costs. Following low growth, high risk and a highly cautious business environment post the Global Financial Crisis it became necessary for him to find measures to stimulate growth and encourage money to flow and flow more quickly through the economies overseen by the central bank. These included the long-term and prolific use of quantitative easing – something that, until then, had not been used anything like as broadly or in as high volumes and the effects of which were untested and unknown. As his tenure came to an end, and Christine Lagarde was set to take over the President’s role within the bank, critics were evident and offering fresh concerns regarding how continuing economic doldrums were to be addressed. Their point being; what tools does Lagarde have left now to be effective in providing stimulus and achieving ‘price pressure’ in the EU?
Draghi threw everything at the problem, and, on balance, the bloc emerged from his leadership not much better off in terms of inflation and growth. And these problems remain today. Low inflation and the associated low price pressures mean that the EU continues to operate in a low interest environment, which generally lags a currency’s performance as it invites low inflows (the trade-off being that goods from the EU should experience higher demand due to their relatively low prices, though this is not reflected throughout the 27 member nations currently). Add to this a high level of concern from policymakers of the threat of coronavirus and the result is a 33-month low against the USD of 1.0817 on Friday. Europe’s biggest economy produced zero growth compared to the quarter before from one source, another pointed at just 0.1% growth quarterly in the fourth quarter, which is where the growth was forecasted but the lowest since 2014.
It is not an isolated event, either. The Japanese economy hit headlines recently, as this shrank to a degree not seen in five years, its annualised GDP figure retreating by 6.3% in October to December period 2019. This will heighten concerns that the economy will fall into recession and, as the world’s third largest economy, this is quite a scalp for uncertainty.
Key exchange at the time of writing:
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