Europe is on the decline. The weak euro continues to drive inflation. Corporate balance sheets are being distorted – international investors see this as a weakness for the entire continent. Where is the ECB?
Now the euro has also gotten really bad: the European common currency is constantly declining in value against the dollar.
Yesterday, the euro fell to its lowest level in 20 years, falling below par for the first time in two decades. Since the beginning of the year the minus is 12 percent and since the peak in April 2008 it has been an unbelievable 36 percent.
The multiple current crises have arrived at the heart of our economy, where the monetary blood supply takes place. The fall of the euro is not a statistical phenomenon, but an event that has a noticeable impact on our prosperity. It is only a short way from the foreign exchange markets to energy costs and prices.
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In particular, there are the following five effects that damage every individual and ultimately weaken this continent enormously:
1. The weak euro is driving inflation. Because wherever you have to pay in dollars, for example on the energy markets, a higher amount in euros is now required. This means we get less energy for the same money. Or the other way around: We have to pay more for the same amount of energy.
This imports inflation. It is built into all products from the dollar area, so to speak, jumps over our national border when imported and will soon appear at the shop counter, at the gas station and on the utility bill for apartments or houses.
2. Corporate balance sheets are being distorted. pseudo-giants arise. Because all companies that produce and sell in the dollar area now have to book higher amounts when exchanging them for euros. Extrapolated for the current year as a whole, the 40 Dax companies should achieve between ten and 30 billion euros in additional profits before taxes, interest, depreciation and amortization (Ebitda).
With a currently forecast Ebitda profit of 300 billion euros for the 40 Dax companies, according to calculations by the Handelsblatt, this corresponds to a one-off profit of between three and ten percent – without increasing productivity or product sales. Caution, dear supervisory board members: the weak euro is causing Potemkin villages to appear on the balance sheets of the chief financial officer.
3. Normally, a weaker euro makes shares in the euro area cheaper and therefore more attractive. But that is not the case at the moment. International investors see the weakness of the euro as a weakness in Europe, as a visible sign of our relative decline in the global economy, and are withdrawing from investments on this continent. The leading German index, the Dax, has lost 20 percent in value over the past six months, as has the Euro Stoxx 50 index.
4. The weakness of the euro illuminates the fearful paralysis of the ECB. Because of course the dollar is benefiting from the interest rate turnaround that has already been initiated in Washington by the central bank there. The Fed has already hiked interest rates by 1.5 percentage points, or 150 basis points, this year. A higher interest rate level makes the currency more attractive.
However, the ECB is reluctant to raise interest rates noticeably because doing so would bring debtors in southern Europe to their knees. It has maneuvered itself into this situation and is therefore not only the victim of the euro’s weakness, but its driver.
5. On the other hand, the ECB cannot accept the divergence between the euro and the dollar – and thus the drift in interest rates – in the long term. It has to become active – all the more because of the weakness of the euro and the resulting inflationary pressure. However, this also increases the risk of a sovereign debt crisis in southern Europe. Higher interest rates are a burden on local households.
It is questionable whether the debtor countries can pay them at all. With Spain, France and Italy three of the large EU countries report a public debt of more than 100 percent of the gross domestic product. In Greece, the level of debt is almost 200 percent. The fear of insolvency is already weighing on the common currency – and is likely to cause the euro to fall further.
Conclusion: This is not about speculative gimmicks on the foreign exchange markets. It’s about the value of our money and the political stability of Europe. The relative decline of Europe is no longer a fear, but a fact. The silence of the ECB chief and EU President on this shift in power and wealth is deafening.
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, CEO of the Handelsblatt Media Group. You can subscribe to his free newsletter here.
