Zhong Zhengsheng: There are three major catalytic factors for the devaluation of the euro: first, the deterioration of the energy crisis, second, the forced increase of the EU's fiscal capacity, and third, the change of the UK. The euro crisis is unlikely to turn around and there is a possibility of further deterioration.
2022year8Since late this month, the exchange rate between the euro and the US dollar has been mostly below1, once in9month6Intraday drop below0.99Within the year, it has depreciated by nearly13%。 From the external environment, the US economy is in a relative advantage in the international energy shock, and the Federal Reserve's tightening has more confidence, putting pressure on most non US currency exchange rates. This article mainly discusses the reasons, impacts, and prospects of the recent accelerated depreciation of the euro from a European perspective. We believe that there are three catalytic factors behind the recent devaluation of the euro: first, the deterioration of the energy crisis, second, the forced increase of the EU's fiscal capacity, and third, the changes in the British political situation and the devaluation of the British pound. Unlike in the past, this round of depreciation of the euro is unlikely to boost export growth, but may weaken the purchasing power of the euro and exacerbate inflationary pressure, with more harm than good effects on the eurozone economy. Looking back, considering the approaching economic recession in the eurozone, the difficulty in eliminating European debt risks, and the challenges faced by the euro's medium to long-term credibility, this "euro crisis" may not have a turning point for the time being, but there is a possibility of further deterioration. 1、 New Pressure on Euro Exchange Rate 1Energy crisis deepened 8In the latter half of this month, the energy shortage problem in Europe sharply worsened, which is an important background for the euro exchange rate to fall below parity.IPEUK Natural GasfuturesPrice in8Month end rise640penny/Sem, over3month7The daily high continues to reach a new historical high, compared to7The monthly average has increased230%。 The rise in natural gas prices has triggered a surge in electricity prices, according to the European Energy Exchange（EEX）Data shows that the electricity futures prices delivered by Germany in the fourth quarter of this year (peak)8Month end rise and fall1000euro/Megawatt hours, compared to7Month end rise200%。 Recently, the European energy market is facing three disturbances: firstly, the scorching summer weather has increased energy demand. Secondly, concerns about Russia's natural gas supply shortage are "re existing" and "fulfilled".8Late this month, Russia announced that it will8month31Starting from today, the Beixi No.1 pipeline will be repaired for three days7The second maintenance since mid month has raised concerns about supply disruptions in the market.9month2Japan and Russia announced an "indefinite" closure of the pipeline on the grounds of a "main turbine leak". Subsequently, the Russian side "bluntly" attributed the natural gas supply interruption to Western sanctions, which means that the Beixi No.1 may be difficult to recover due to political obstacles. Thirdly, OPEC has taken action to protect oil prices.8In late this month, facing the risk of Iran's oil return and declining demand, OPEC countries immediately sent a signal that they would consider reducing production, and oil distribution returned100dollar/Above the barrel.9month5Day, OPEC+Announce that the10Reduce production from the beginning of the month1010000 barrels/This move demonstrates the group's determination to maintain oil prices, and the variability of international oil prices has also increased the risk of energy inflation in Europe. 2Policy of "drinking poison to quench thirst" Since the beginning of this year, EU members have actively promoted "price control+The energy relief measures of "fiscal subsidies" have not achieved ideal results. Germany9month4Announced a new round on the day650 The billion euro inflation rescue plan has previously announced two rounds of value300The billion euro rescue plan only had a temporary effect. Germany6monthCPIYear on year from7.9%Fallback to7.6%Compared to the previous month0.9%lower0.1%But7monthCPIMoM rebound to0.9%、8monthCPIRebound year-on-year to7.9%。 along with8The monthly energy prices have further increased, and the European Union is considering implementing stronger intervention policies in the energy market. Specific measures will be taken in the9month9Announced at the EU Energy Ministerial Conference on the day of. The energy crisis has continued to ferment, forcing the EU to increase its financial resources. According to European think tanksBruegelStatistics,2021year9Month to2022year7In January, Italy, Spain, France, and Germany have respectively utilized valueGDPof2.8%、2.3%、1.8%and1.7%To deal with the energy crisis. As of the end of this year7In June, Germany's federal budget deficit accumulated to658Billion euros, already over2020Yearly level. We believe that EU intervention in the energy market can only alleviate the chaos in some markets, and it is difficult to fundamentally solve the energy crisis. Moreover, the risk of excessive policy intervention is also rising: on the one hand, excessive price control may distort the Price signal, causing the risk of supply contraction, which is also not conducive to curbing demand, thus inflation may rebound more substantially in the future; On the other hand, rapidly growing fiscal expenditures may threaten fiscal discipline and the credibility of the euro, further strengthening the expectation of euro depreciation. 3Political fluctuations in the UK The rapid depreciation of the pound in recent times may cause a drag on the exchange rate against the euro. this year8The exchange rate between the euro and the US dollar fell throughout the month1.7%The pound fell sharply against the US dollar4.5%。 Historical experience has shown that the strong synchronization between the exchange rates of the pound and the euro against the US dollar is due to their high economic and political correlation. for example2020year3month18-19The pound plummeted against the US dollar over the past two days4.7%The main reason for the delay in Brexit negotiations due to the epidemic, and the increasing market concern about the UK's "hard Brexit", has also led to a decline in the euro against the US dollar during the same period2.8%。 The recent rapid devaluation of the British pound, on the one hand, is also plagued by the energy crisis, on the other hand, is also related to the changes in the British political situation. Former Prime Minister Johnson succeeded7month7After announcing his resignation, he became even more eager to assist Ukraine in the hope of leaving behind his final political legacy.8Later this month, Johnson visited Ukraine and promised to add5000The military aid of £ 10000 not only increased the financial pressure on the UK, but also was not conducive to alleviating geopolitical conflicts, prompting the accelerated depreciation of the pound.9month5Truss was elected the leader of the Conservative Party and succeeded to the new Prime Minister on January 1. His diplomatic philosophy was strong, and he claimed that he would "press the nuclear button" when necessary. In the future, the British economy may be further negatively affected by geopolitics. First of all, Truss said that he would redouble his support for Ukraine, which may further incite the Russia-Ukraine conflict; Secondly, as it strengthens the EU, trade cooperation between the UK and Europe may face more obstacles; Once again, it has shown hostility towards Russia and China, and against the backdrop of the North Stream 1 outage and the EU's active promotion of the construction of the China Europe natural gas pipeline, the outlook for UK energy imports is even bleak. In terms of domestic economic policy, Truss considered using fiscal expenditure worth more than 100 billion pounds to subsidize energy consumption. Although it was an emergency move, it was also suspected of "drinking poison to quench thirst".
chart1The strong synchronization between the exchange rates of the pound and the euro against the US dollar is due to their high economic and political correlation 2、 The Advantages and Disadvantages of the Depreciation of the Euro Usually, exchange rate depreciation is not entirely a bad thing, but can play a "balancer" role in international trade and capital flows, which is expected to hedge economic downturn and capital outflow pressure to some extent. Historical experience has shown that as an export-oriented economy, the moderate depreciation of the euro has a driving effect on its exports and economy.2005Since the beginning of the year, data shows that the exchange rate of the euro is related to the manufacturing industry in the eurozonePMILeading1The correlation around the year. This round of euro depreciation began with2021year6According to common sense, the depreciation of the euro is expected to boost the manufacturing and export sectors in the second half of this year. However, we believe that this round of depreciation of the euro may not boost exports as expected, and the overall impact on the economy may outweigh the benefits. On the one hand, the current import growth in the Eurozone is faster than that of exports. Against the backdrop of rising international raw material prices, the depreciation of the euro may boost export competitiveness, making it difficult to offset the increase in import cost pressure. As of this year6In the month of, the amount of goods trade in the Eurozone (calculated in euros, the same below) has been continuous8There was a deficit in the past month, with imports increasing year-on-year44%Year-on-year growth in export volume20%。 On the other hand, the increasing downward pressure on the global economy means that there is limited room for incremental exports of goods from the eurozone. The United States and China are important destinations for Eurozone commodity exports. As of this year6In June, the US and China accounted for a total of22.5%Among them, due to the slowdown in Chinese demand growth, the export volume of goods from the eurozone to China has decreased year-on-year3%； Although exports from the eurozone to the United States have increased year-on-year28%However, considering that the Federal Reserve's tightening will further suppress demand, US import demand may also slow down. 3、 Next steps in the 'Euro Crisis' 1Decline gradually approaching Historical experience shows that if the depreciation of the euro occurs simultaneously with the economic downturn, the rebound of the euro often occurs after economic growth stagnates or shrinks. for example2002year1Quarterly2009year1Quarterly2012year3Quarterly and2020year2In the quarter, these few nodes where the euro exchange rate bottomed out are all based on the actual situation in the eurozoneGDPLess than quarterly year-on-year0.5%Most of the time, it has already fallen into recession. Compared to the current situation, the actual situation in the eurozoneGDPThis year2Quarterly year-on-year growth4%Around the corner, the economic recession has not yet materialized, or it also means that the euro exchange rate has not yet bottomed out.
chart2Historical experience shows that the rebound of the euro often occurs after economic growth stagnates or contracts Looking back, the probability of economic recession in the eurozone is high, and the timeline may be advanced to within the year. Firstly, Russia's gas supply cut directly weakens the eurozoneGDPGrowth. Integrated European Commission5Spring forecast report for the month, andIMF 7According to the article "The Impact of Russia's Gas Cutoff on the European Economy" in September, the gas cut in Russia may directly weaken the eurozone throughout the yearGDPincrease1-2Percentage points. Subsequently, the recession point in the eurozone may be brought forward to this year4Quarter or next year1Quarterly. Secondly, energy scarcity may bring broader inflationary pressures, suppressing consumption and investment demand. Finally, the monetary tightening of the European Central Bank may be forced to increase, further threatening the growth of demand in the eurozone. It is worth mentioning that the current eurozone and1970The United States of the era has many similarities. Firstly, the eurozone economy is highly dependent on energy but suffers from supply shocks, just as the United States before the shale oil revolution suffered1973Year and1979Two oil crises in. Second, monetary tightening in the euro area may be constrained by the problem of "fragmentation", just as the Fed's tightening was opposed by the political circles that year and missed the best opportunity to curb inflation. Thirdly, the intervention of eurozone governments in prices may be excessive, just as1971-74The Nixon administration's price control in caused more serious scarcity. Therefore, the possibility of severe "stagflation" in the eurozone and subsequent deep recession cannot be ruled out. 2European debt risks still exist 6Late month to8In mid month, the eurozone sovereign bond market rebounded slightly,10The annual German bond interest rate once fell to1%following,10The lowest level of annual debt has dropped to3%following. The main factors contributing to the improvement of the external environment include a pullback in international commodity prices, a cooling of the Federal Reserve's tightening expectations, and a decline in US bond interest rates. but8Since the end of the month,10The interest rate of annual German bonds has returned1.5%、10The interest rate of Yiyi bonds has returned4%The above "warning line" level.9month6Day,10The spread between Italian and German treasury bond with a maturity of2.4Percentage points, reaching7The highest level since the second half of the month is also a signal of an increase in European bond risk. This is enough to indicate that when the external environment deteriorates again, such as the rebound in energy prices and the expected tightening of the Federal Reserve, the European bond market will still be impacted. The risk of the "European debt crisis" erupting again cannot be underestimated. Firstly, recently, the euro exchange rate has continued to fall below the critical point of parity, and expectations of exchange rate depreciation are still heating up, which may weaken international confidence in allocating euro assets and trigger a sell-off of European bonds. Second, the economic downturn in the euro area and the reduction of fiscal revenue, as well as the recent increase in government spending to respond to the energy crisis, may threaten the financial sustainability of member countries, triggering market concerns about the sovereign debt default of vulnerable member countries. Thirdly, the European Central Bank is more likely to be a "booster" of the crisis rather than a "solver".2011The European Central Bank raised interest rates twice in, igniting the debt crisis. This time, the European Central Bank has raised interest rates significantly due to inflationary pressure, and it is expected that the end point of the rate hike will at least reach1.5-2%Both the pace and height of interest rate hikes may exceed2011Year. The current debt and deficit ratios of eurozone members both exceed2010In, Germany, as the locomotive of the European economy, also encountered a "headwind" in its economic growth. Even if the European Central Bank7The transmission and protection mechanism of the Moon Festival（TPI，Transmission Protection Instrument）In order to prevent excessive selling of sovereign bonds of member countries, but anti inflationary pressure will greatly limit the actual rescue capacity of the European Central Bank, and the recent rebound in European bond interest rates may also indicate that the expected guiding effect of the European Central Bank is limited. 3Euro Reputation Endangered When the euro exchange rate falls below parity, it is difficult for the market not to examine the medium to long term value and credibility of the euro. From an economic perspective, the outbreak of the European energy crisis has exposed the long-term energy security and economic security problems in the euro area. When a crisis arrives, especially when the main members are already struggling, it is too ideal for eurozone members to strengthen cooperation to overcome difficulties together. It is worth mentioning that this time Germany is more likely to become a "stumbling block" rather than a "ballast" for the eurozone economy.2010During the European debt crisis in, the German economy had strong resilience and led the eurozone economy out of the crisis. This year, Germany's economic growth is not as high as the overall level of the eurozone,7The manufacturing industry has been weaker than France since the beginning of the month. This also explains why the Bundesbank took the lead in expressing opposition and questioning when the European Central Bank was considering increasing the purchase of sovereign bonds of vulnerable member states. From a political perspective, the eurozone is facing the dilemma of internal fragmentation and weakened international influence. In fact, since2016After Brexit in, there have been significant cracks in the unity of the euro system.2021The end of former German Chancellor Merkel's term in signified the loss of core leadership figures in the European Union. At present, neither the newly appointed German Chancellor Schultz nor the French President Macron seems to be lacking in enthusiasm. The evolution of the Russia-Ukraine conflict this year also exposed the EU's ability to deal with political and military crises. In addition, the European energy crisis has also hindered the progress of the EU in the field of green energy. The "flag bearer" of the global response to climate change is in a dilemma, which may lead to the further decline of the EU's international influence. In short, this' euro crisis' may only be the prelude to the collapse of the euro's credibility. Even if the international energy shortage gradually alleviates in the future and the US recession gradually materializes, causing a slight rebound in the euro exchange rate, the credibility of the euro may be difficult to "return to the past". Note: This article only represents the author's personal views. Zhong Zhengsheng is the Chief Economist and Research Director of Ping An Securities, while Fan Chengkai is a macro analyst at Ping An Securities. |
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