[Economics] Experts believe that the drop in the euro will weigh down the economy, but without a recession

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The euro was trading at $1.0182 on Thursday, the lowest in two decades.

The euro was exchanged this Thursday at 1.0182 US dollars.

 

The depreciation of the euro, which is already close to parity with the US dollar, constitutes a further burden for the Spanish and European economies, according to experts consulted today by Efe, who warn of a slowdown in growth, although without reaching recession .

 

A weak euro "makes all those products that we pay for in dollars more expensive, especially oil" - explains the deputy director of the IVIE, Joaquín Maudos - which contributes to raising inflation that is already considered the main problem of the European economy and that in June it has stood at 8.6% in the eurozone.

The euro traded at $1.0182 on Thursday, the lowest in two decades after falling 2.3% in just one week and 10.5% so far this year.

US dollar: safe haven in times of uncertainty

 

The strength of the dollar is explained by two major circumstances: "its greater use as a refuge currency in times of crisis and uncertainty such as the current ones" and "by the current and expected interest rate differential caused by the Federal Reserve in relation to the ECB ".

This is explained to EFE by the general director of the Institute of Economic Studies (IEE), Gregorio Izquierdo, who recalls that the rate hikes of the US Federal Reserve (Fed) have been carried out with "greater speed and forcefulness" than those of the Bank. Central European Union (ECB) and that appeals to those looking for higher returns.

Imports more expensive
Traditionally, a weak currency boosts exports, which are cheaper for foreign buyers, thus promoting economic growth.

However, in this case, the devaluation of the euro comes "at the wrong time", with "very high" import prices, especially in the energy field, explains the professor of Macroeconomics at the University of Zaragoza Marcos Sanso .

 

The drop in the euro is going to imply "an additional increase" in these imports, adds Sanso, and, consequently, in production processes, which will slow down exports instead of boosting them, points out IEB professor Javier Santacruz.

To this is added the temporary factor, since "a weaker euro can help in the medium term to improve exports, but this effect is not as immediate as the increase in import prices," explains Izquierdo.

In addition, "the strong technological content of European exports makes them more insensitive to price and more dependent on the cycle of consumption and investment of our foreign clients", commented the general director of the IEE.

In short, these increases add more inflation and worsen the trade balance, which together with the less attractive interest rates contribute to "deepen the crisis in Europe", says Santacruz.

 

This increase in import prices "complicates the task of reducing inflation", which is the main problem of the European economy, points out the director of the Funcas Economic Situation, Raymond Torres.

This negative impact exceeds the gain in competitiveness derived from the depreciation of the euro, Torres points out, adding that this would be partially canceled out by the depreciation of other currencies.

Experts rule out recession
"We have a complicated scenario for months and years," acknowledges Torres, since the effect of this depreciation is "more inflation and less growth", although he still believes that Spain "will be able to avoid recession" due to its less dependence on Russian gas .

The depreciation of the euro is "one more factor" towards recession, Sanso acknowledges, a possibility that is not in the central scenario of Izquierdo. However, everyone will warn that the scenario would change in the event of a total cut off of Russian gas.

Looking to the future, experts point out that the markets are already discounting the rate hike announced by the ECB for July, but they believe that more intense rises could help recover the price of the euro. (ME)

 

Link: https://www.eluniverso.com/noticias/internacional/expertos-creen-que-la-bajada-del-euro-lastrara-la-economia-pero-sin-recesion-nota/