Just months after the intense adverse effect of the COVID-19 pandemic, Europe seems to be headed for another economic crisis owing to rising inflation, the energy crisis, and the increase of debts in some of the member countries. The situation is starting to take a toll on the Euro currency dominance, and the equity and cryptocurrency markets may be affected.
What’s the Europe crisis all about?
Europe is currently faced with several macroeconomic crises, which is clearly evident with the recent decline in EURO’s dominance against the US dollar. While Europe managed to ease its way out of the pandemic crisis, it ran into more problems following the Russia-Ukraine conflict, wherein the European Union, the United Kingdom, and the United States announced heavy sanctions on Russia.
Note that Russia is the largest supplier of gas to Europe, accounting for about 43.4% in 2020. Due to the sanctions, however, the EU was obliged to cut down oil imports from Russia, which consequently spiked gas prices amid high energy demand. Several businesses are being priced out amid high energy costs, and it’s feared that the economy will be significantly impacted should more businesses close operations due to losses incurred by high energy costs.
Amidst Europe’s energy crisis is the issue of inflation. The inflation rate across Eurozone was reported at 9.8% in July, which marks a 25-year increment. Some of the countries affected the most are Estonia (23%), Latvia (21.3%), and Lithuania (20.9%). EU’s statistics agency, Eurostat, said the rising cost of energy and food were the major drivers of EU’s inflation.
The inflation rate in Europe may even become worse for member states as Russia has indefinitely cut off gas supplies to the continent. Winter is just months away, meaning an impending spike in energy demand. If Europe fails to address the energy crisis earlier, there will be a massive spike in energy prices – a.k.a hyperinflation.
With the brewing crisis, some of Europe’s net importing countries, especially the PIGS (Portugal, Italy, Greece, and Spain), are running high on debts and risk defaulting. Previously, the European Central Bank (ECB) would stand up for these countries and buy off these debts because, overall, the EU is a net exporter, which is the lifeline for EURO’s dominance.
However, some major EU exporting countries like Germany have also turned into net importers, affecting the EURO demand, which explains the recent decrease in the currency’s dominance against the US dollar.
Should the ECB no longer intervene, some nations may decide to break away to create and print their own currency to escape inflation.
“[…] If they raise rates and they stop the purchasing of debt from southern countries, which would protect the value of the euro. By doing that, you raise rates, you stop printing money. Then you run into a scenario where no one’s buying PIGS’ nations’ debt.
And at that point, they default on their debts, and if PIGS nations default on their debt — again, this is Portugal, Italy, Greece, and Spain — you’re running into a problem where they need to renominate in their own currency so that they can actually print their way and inflate their way out of it,” Crypto expert, Brandon Green explained in a recent podcast.
How the Europe crisis affects the crypto market
Europe is a major pillar of the global economy. If the EU’s economy worsens amid the brewing inflation, rising debts, and energy costs, the impact would be felt across several sectors of the world’s economy, with the equity and crypto markets included. A drop in demand from the European regions will hamper global trade, according to Coface.
The escalation of the crisis in Europe could extend the fall of the EURO’s dominance, which means good for the US dollar. However, the rise of the dollar is not generally good for equities and cryptocurrency markets. In a recent tweet, former hedge fund manager Raoul Pal narrated that the US dollar could “really break things” if it keeps going parabolic.
“But it could cause a nasty week in risk assets. I dont think equities make new lows but Im not sure of that. Same with crypto. Personally, I think we get saved by weak economic data this week,” Pal added.
For some reason, it is not so feasible for the European authorities to reconcile with Russia now and lift the sanctions just to resolve the energy crisis.
Speculations are that Europe may resort to printing more money and enforcing yield controls to cushion the bond market from killing the entire market.
Yield controls favor the dollar and could result in a higher increase in the DXY, U.S. Dollar Index.
Such a scenario kills emerging market debt as it will force investors to dump their USD bonds to buy dollars. This would also put the US market on the verge of collapsing, given that all financial models are based on US treasuries (bonds).
