Just a few months after the intense adverse effects of the COVID-19 pandemic, Europe seems to be heading for a new economic crisis due to rising inflation, the energy crisis and rising debts in some of member countries. The situation is starting to weigh on the dominance of the euro, and the equity and cryptocurrency markets could be affected.
What is the European crisis?
Europe is currently facing several macroeconomic crises, which is clearly evident with the recent decline in the dominance of the EURO against the US dollar. While Europe managed to emerge easily from the pandemic crisis, it encountered more problems following the Russian-Ukrainian conflict, during which the European Union, the United Kingdom and the United States announced heavy sanctions against Russia.
Note that Russia is Europe’s largest gas supplier, accounting for around 43.4% in 2020. Due to sanctions, however, the EU has been forced to reduce oil imports from Russia, which which consequently drove up gas prices in a context of high energy demand. Several businesses are seeing their prices drop due to high energy costs, and there are fears that the economy could be significantly affected if more businesses shut down due to losses from high energy costs.
At the heart of the energy crisis in Europe is the question of inflation. The inflation rate in the Eurozone was reported at 9.8% in July, marking a 25-year increase. Some of the most affected countries are Estonia (23%), Latvia (21.3%) and Lithuania (20.9%). The EU’s statistics agency, Eurostat, said the rising cost of energy and food was the main driver of inflation in the EU.
The rate of inflation in Europe could even worsen for member states, as Russia has cut gas supplies to the continent indefinitely. Winter is only a few months away, which means an imminent peak in energy demand. If Europe fails to resolve the energy crisis sooner, there will be a massive spike in energy prices – i.e. hyperinflation.
With the beer crisis, some net importing countries in Europe, in particular the PIGS (Portugal, Italy, Greece and Spain), are heavily indebted and at risk of default. Previously, the European Central Bank (ECB) defended these countries and bought up these debts because, overall, the EU is a net exporter, which is the lifeline of EURO dominance.
However, some major exporting countries in the EU like Germany have also become net importers, affecting the demand for EURO, which explains the recent decline in the currency’s dominance against the US dollar.
If the ECB did not intervene any more, some nations could decide to separate to create and print their own currency in order to escape inflation.
“[…] If they raise rates and stop buying debt from southern countries, that would protect the value of the euro. By doing this you raise rates, you stop printing money. Then you end up in a scenario where no one is buying the nations debt from PIGS.
And then they default on their debts, and if the PIGS countries default on their debt – again, it’s Portugal, Italy, Greece and Spain – you have a problem where they have to rename in their own currency so they can actually print their way and inflate their way,” explained crypto expert Brandon Green in a recent podcast.
How the European Crisis is Affecting the Crypto Market
Europe is a major pillar of the global economy. If the EU economy deteriorates amid simmering inflation, rising debt and energy costs, the impact will be felt across multiple sectors of the global economy, including markets stocks and crypto. A drop in demand from European regions will hamper global trade, according to Coface.
The escalation of the crisis in Europe could prolong the fall of EURO dominance, which is good for the US Dollar. However, the rising dollar is generally not good for the equity and cryptocurrency markets. In a recent tweet, former hedge fund manager Raoul Pal said the US dollar could “really break things” if it continues to go parabolic.
“But it could cause a bad week in risk assets. I don’t think stocks are hitting new lows, but I’m not sure. Same with crypto. Personally, I think we’re saved by weak economic data this week,” Pal added.
For some reason, it is not so possible for European authorities to reconcile with Russia now and lift sanctions just to solve the energy crisis.
Speculation is that Europe may resort to printing more money and enforcing yield controls to prevent the bond market from killing the entire market.
Yield controls favor the dollar and could lead to a larger rise in DXY, the US dollar index.
Such a scenario kills emerging market debt because it will force investors to dump their dollar bonds to buy dollars. It would also put the US market on the brink of collapse, since all financial models are based on US Treasuries (bonds).