Many readers may be aware, since the numbers have been warning us; but this past month we received confirmation. The Eurozone is treading dangerously, hovering over the fine line. It only recently floated above figures from after the great recession and European financial crisis. January’s sudden devaluation of the single currency can only be looked at with uncertainty both by investors and the European Central Bank (ECB), as the Euro continues a downward spiral. There are explanations for this. The main culprit is oil prices which are down by over half in comparison to mid-2014. The tags on energy have also taken a sharp downturn of 9% this past month; and in an overall comparison to last year, we see prices have fallen by 0.6%.
For many these figures mean little, we can put them into perspective. Europe as a single currency union has experienced this type of deflation only once in its past history. I write “history” almost daringly, as the consequences of the 2008 financial crisis are still haunting some of its PIGS economies today (Portugal, Italy, Greece and Spain). In 2009 we saw the only other example of figures this fragile. What ensued as we know, were years of hardship, bank crashes and long unemployment lines. The ECB has tried indeed to counter these measures by pumping in flows of cash.
In an effort to uplift the current devaluation, it recently provided an influx of 1 trillion Euros into the economy. The hope was to uplift prices and slow down the rate of deflation, through what is known as quantitative easing. The move has not been immediately effective – or perhaps it’s too early to tell. But at the beginning of February, we still saw growth in important nations such as Germany, France, Austria, Italy the Netherlands, Spain and the usual suspects Greece; at its lowest since June of 2013. Does this mean we’re at the edge of another period of sustained recession?
The answer is probably no, as the numbers do seem to have stabilised in past weeks – at least temporarily. We are however, at the edge of many questions being asked in concern about the Euro’s stability as a reliable currency, particularly by nations who are already skeptical of their European Union (EU) Membership. The main one to stand out is the United Kingdom (UK). The Pound sterling’s value soared to the highest in seven years above the wavering Euro, something that may seem appealing to the public, but appalling to businesses. This is because whilst vacations for the British might end up costing less, British firms who rely on their exports to mainland Europe might pay the ultimate price. Trade is bound to weaken, investments fall and the sense of insecurity increase. Summed up; profits drop.
This combined with the rise in popularity of the United Kingdom Independence Party (UKIP) at the dawn of upcoming British elections; this is something that’s making Brussels tremble. The Eurozone needs the money the UK provides it with. Greece is another example of the Euro’s turbulent unison. Whilst the debt-ridden economy might not be in a position to make many demands, Alexis Tsipras’ rejuvenated government is not about to beg for mercy.
The charismatic young leader is looking Germany, the International Monetary Fund (IMF) and the ECB in the eye and negotiating alternative means for the repayment of his country’s debt. All this capped off with rumours of a possible EU exit. The Eurozone is in no position to let countries take the high road and go their own way, especially if it is to uphold a now tarnished reputation regarding its cohesion as a currency union. So what does this mean for the euro’s future? Is this the commencement of dissolution? Times are uncertain, but this is unlikely, largely due to the cost of respective nations going back to Marks, Pesetas, Liras or Drachmas. Furthermore, recessions do not always mean that growth cannot take place.
The example is Spain, where an increase in productivity was witnessed in last year’s fourth quarter in spite of prices falling the year-round. So it can be done, all in spite of the internal disputes and the shaking EU infrastructure and monetary instability at large. It remains to be seen what direction the current situation takes. It may be some time before there is some clarity. For at the moment there are many unpredictable variables.
Beyond the seemingly pessimistic short-term figures of the economy a sequel to the 2008 financial crisis can be ruled out. Only the next few months will provide us with a definite answer to the Eurozone Incognito. (Caption for picture) The Euro’s value has been gradually falling in 2014 and plunged against the pound last month, in what signified the highest difference since the 2008 financial crisis. Source: XE