The weakness of the euro, symbol of a slowing economy

For the third consecutive day, the euro remained below parity with the dollar, Wednesday August 24th. At 99 dollar cents for 1 euro, the single currency is at its lowest level since 2002. Beyond the symbol, it is a decline of 13% since the beginning of the year. It comes at the worst time. Most oil and gas is traded in dollars. The decline of the euro makes energy imports all the more expensive, the prices of which have soared since the invasion of Ukraine by Russia on 24 February.

As always, the decline of the single currency is largely a story of central banks. The European Central Bank (ECB) has only just started raising its interest rate, while the US Fed started in March. The difference between the key rate of the two regions went from half a point at the start of the year to two points on August 25.

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For investors, the dollar zone is now much better remunerated, and financial flows have logically flowed there. But the weakness of the euro is also the symbol of an economy in full slowdown. “A recession seems likely, estimates Gilles Moëc, chief economist of the insurer Axa. It may not be as early as the third quarter, because we are still benefiting from the post-pandemic rebound [de Covid], but probably by the end of the year. »

“We were extremely optimistic for the euro zone at the start of the year, recalls Alejandra Grindal, chief economist at Ned Davis Research, an investment research firm. The war in Ukraine changed everything. The euro zone is an energy importer, and particularly dependent on Russia. » M^me Grindal has developed an index of “probability of recession” which includes nine indicators: five of them are currently in the red.

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The summer was particularly difficult on the energy front for Europe. While the price of gas had stabilized in the spring, it has doubled again since June, a consequence of Russia’s decision to supply its gas pipelines only in dribs and drabs. Compared to before the pandemic, which appeared at the start of 2020, the price of gas has been multiplied… by fifteen. “For most of the main countries of the euro zone, the gas shock is more important than the oil shocks of 1974 and 1979”calculates Andrew Kenningham, chief economist for Europe of the research firm Capital Economics.

One country is particularly worrying: Germany. “Its growth model was heavily dependent on cheap Russian energy. It’s over “, underlined, on Twitter, on August 16, Robin Brooks, chief economist at the Institute of International Finance. Another weak link is Italy, which is also very heavily dependent on Russian gas, while France is one of the major countries with the least exposure, according to calculations by Capital Economics.

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