The weakness of the Eurozone is playing a major part in the currency market and forecasts that the 18-member currency bloc is heading towards recession has meant that the Euro (EUR) exchange rate has fallen sharply against the Pound (GBP), US Dollar (USD) and other major peers.
The question being asked by many economists and traders is, will the Eurozone re-enter recession by Christmas?
Furthermore, the weakness in the Eurozone has been cited as a major threat to the UK economy. Prime Minister David Cameron recently warned; ‘Britain’s economy is growing well but we are not immune to economic problems elsewhere in Europe.’ Head of the International Monetary Fund (IMF) Christine Lagarde also warned that the Eurozone is at ‘serious risk’ of sliding back into recession.
An Extension of the Euro Crisis
The Eurozone has been in crisis for years. Back in 2009, the major point of concern for Europe was the so-called ‘Euro crisis’, which saw the Greek economy devastated and thay nation’s woes spread to other parts of the Eurozone such as Spain, Portugal, Ireland and Italy.
At the time, economists had issued warnings over the threat posed by contagion (that the problems at the Eurozone periphery could seep into the region’s heart). That fear was eased slightly however after European Central Bank President Mario Draghi calmed nerves by saying that he would do everything in his power to save and support the currency bloc.
For a time, it looked as though Draghi’s comments had worked and that the Eurozone was slowly but surely heading towards a recovery. As 2013 came to a close things were looking rosy for the region with Spain, Ireland and Italy showing signs of improvement. France and Germany managed to drag the region out of recession but then the Ukraine crisis began, and with it, fears of contagion resurfaced in force.
Ukraine War Stalls the German Engine
The standoff between the west and Russia caused economists to disregard Draghi’s comments as the imposition of sanctions against Russia highlighted the vulnerability of the Eurozone’s heart. Germany, the engine that powers the Eurozone, began to suffer as uncertainty spread and trade with one of its biggest trading partners was heavily hit by the Ukraine crisis. As the war in eastern Ukraine escalated, so did the sanctions against Russia and the tit-for-tat response by Moscow.
Sentiment in Germany fell while, manufacturing production, industrial production, retail sales and other factors that determine the health of an economy all declined throughout 2014. The contagion had spread to the core of the Eurozone. France, the second largest Eurozone economy was also in trouble and Italy, (the regions third largest) slid back into recession.
Record low inflation levels across the Eurozone also played its part in causing fear over the health of the region. Unemployment remains at stubbornly high levels. Few can deny that the Eurozone is faltering.
This Friday will see the publication of the latest Eurozone GDP Growth Rate figures for the third quarter of 2014. Economists are forecasting that growth has stalled at just 0.1%.
The Eurozone could be saved from experiencing a contraction in growth due to improvements in Spain and Ireland, but it is not looking good.
News broke on Tuesday that Europe, the UK and USA are threatening to tighten their sanctions against Russia as the conflict in Ukraine reignites. More sanctions are likely to harm Germany even more and a weak Germany does not bode well for economic growth in Europe.
The European Union and its allies are stepping up criticism of Russia after a November 2 election by the self-proclaimed separatist republics of Donetsk and Luhansk renewed tensions and threatens to plunge the region into open warfare.
Will the Eurozone Enter Recession by Christmas?
The answer to that question all depends on the Ukraine crisis and whether the ECB’s introduced monetary easing measures and interest rate cuts will aid growth and tackle the threat posed by deflation.
With economic data releases out of the Eurozones leading economies and concerns over a global economic slowdown it is looking likely that the region will indeed slide into recession by the end of the year. It will take a de-escalation of the Ukraine crisis and signs of growth and rising inflation to put recession fears to rest.
On Thursday concerns over a Eurozone recession eased slightly as inflation data out of France showed signs of improvement. Investors however will be casting a wary eye on the situation in Ukraine. If war erupts again then we could see Europe and the west impose more sanctions on Russia, a move that could tip Germany and perhaps the wider region into a recession.
