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Inflation is rising, the risk of fragmentation remains, the energy crisis is worsening, droughts are causing public health and safety impacts, and supply chain bottlenecks persist – Europe is suffering from unprecedented economic and natural conditions. No wonder the euro fell to 2002 levels.
What will the ECB do? Will the regulator raise interest rates by 75 basis points or wait for more data? The answer lies in the Central Bank’s priorities. Despite the fact the EU economy is heading toward a recession, the primary objective of the ECB’s monetary policy is to maintain price stability. Thus, the regulator could go full-speed in tightening monetary policy.
The catch is that a rate hike would have no effect on the drivers of rising consumer prices, in particular electricity shortages. The recently approved €65 billion package to combat the effects of Germany’s energy crisis is unlikely to reduce inflationary pressures, if not the other way around.
Combined with the latest package, Germany’s total spending on dealing with the energy crisis already amounts to nearly 100 billion euros. However, inflation pressures persist. By comparison, the government spent 300 billion euros to keep the German economy afloat during the coronavirus pandemic. Let’s see what EU energy ministers will come up with on September 9.
Lack of progress on the energy crisis and a tightening of monetary policy will leave dozens, if not hundreds, of companies at risk of default. Not surprisingly, the Finance Minister of Sweden recently announced its intention to provide energy companies with liquidity guarantees worth about $23.23 billion to help prevent a financial crisis.
If things ultimately get out of hand, EUR/USD could fall even further. Goldman Sachs analysts forecast a level of around 97 U.S. cents for the next 3 months from 99 U.S. cents previously. They also believe the euro will remain below parity with the dollar over the next six months. They had earlier forecast a recovery in the EUR/USD pair to 1.02.
