Source: Economic Reference Newspaper
The Eurogroup meeting was held in Brussels on the 11th, focusing on the current economic situation in the euro area, policy challenges and how to deal with high inflation. Euro zone finance ministers at the meeting said that despite the current slowdown in European economic growth, suppressing inflation remains a top priority. The European Commission said on the same day that it will once again lower its economic growth forecast for this year and raise its inflation forecast in the near future.
The EU will lower its economic growth forecasts
The European Commission introduced the current economic situation to the euro zone finance ministers attending the meeting on the 11th. The European Commission said it would again lower its economic growth forecasts for this year and raise its inflation forecasts, but said there were no signs of recession in Europe at the moment. The European Commission will release the latest summer economic outlook report on the 14th.
Valdis Dombrovskis, the European Commission's executive vice-president for economic affairs, said economic growth will be revised down this year and next. He also warned that persistently high energy prices are gradually affecting other areas of the economy and inflation is becoming more entrenched and pervasive.
Donbrowskis said the EU economy has shown considerable resilience this year, but, amid many uncertainties and risk factors, economic expectations are still likely to adjust downwards, and the downward adjustment may be even greater next year.
Paul Gentiloni, the European Commission's commissioner for economic affairs, said at a news conference that the European economy is currently in a difficult situation. The crisis in Ukraine has hit economic confidence, pushed up inflation and triggered high levels of uncertainty. He said risks to the economy are increasing as Russia could cut off gas supplies to Europe. The EU plans to take a series of measures to alleviate inflationary pressures from natural gas imports.
In May, the European Commission had slashed its euro zone economic growth forecast for this year to 2.7 percent from 4 percent in February and to 2.3 percent for next year from 2.7 percent.
Previously, the International Monetary Fund (IMF) has also warned that the Ukraine crisis could cause a serious drag on European economic growth.
On fiscal policy, the Eurogroup discussed the state of the eurozone budget and the direction of fiscal policy for 2023. Eurogroup Chairman Donojo said he would commit to maintaining debt sustainability and long-term growth prospects and avoiding increased inflationary pressures.
Eurozone finance ministers remained underlining the importance of addressing inflation now, expressing a willingness to push for prudent fiscal policy, namely further scaling back stimulus and structural reforms.
The European Commission also called on member states, particularly highly indebted countries, to move from broader stimulus policies to more prudent policies and to adapt policies to rapidly changing economic conditions at any time.
Recession fears are hard to dispel
In June, eurozone inflation hit a new high of 8.6 percent. This level of inflation is still well above the European Commission's expectations. The European Commission in May expected inflation in the eurozone to be 6.1 percent and 2.7 percent this year and next.
In response to high inflation, the ECB plans to announce its first rate hike in 11 years at its monetary policy meeting on July 21. The European Central Bank announced in June that it would start a cycle of rate hikes, with plans to raise rates by 25 basis points in July and stop net worth purchases from July 1.
Some economists worry that the ECB's interest rate hikes will be a drag on growth and increase the debt burden of some highly indebted countries, especially in the context of rising energy prices in Europe.
Nord Stream-1, the largest existing cross-border pipeline of natural gas from Russia to Europe, will enter a 10-day annual maintenance period and suspend gas transmission as planned on the 11th, which means that the gas supply crisis in Europe due to the Ukraine crisis and sanctions against Russia will further deteriorate.
Baypan Rai, an analyst at Imperial Bank of Commerce Capital Markets in Canada, said the market's biggest concern at the moment is whether the Nord Stream-1 gas pipeline will resume operations, and if not, the market is likely to expect the European economy to fall into recession.
Stephen Innes, an analyst at SPI Asset Management, said the coming weeks would be extremely challenging for Europe and that huge uncertainties could continue into August.
However, for the debt risk problem faced by Europe in the context of interest rate hikes, Klaus Raieglin, head of the European Stability Mechanism and economist, said on the 7th that the interest rate hike process to be opened by the European Central Bank will not trigger a new euro crisis, and the debt sustainability of eurozone members will not be directly threatened. In the case of Greece, the country with the highest share of gross domestic product (GDP) in the euro area, most of its debt is fixed at fixed interest rates with an average maturity of about 20 years, so its debt sustainability will not be seriously affected.
The euro continued to fall against the dollar
Due to the growing concern that the energy crisis will plunge the European economy into recession, the Fed's interest rate hike is much faster than the European Central Bank and other factors, the euro against the dollar exchange rate continued to decline on the 11th, and the euro against the dollar has been very close to parity. On that day, the euro fell to 1.0051 euros per euro, the lowest since December 2002. As of the end of the New York currency market, 1 euro was exchanged for $1.0065, down from $1.0178 in the previous session.
In anticipation of the Fed's continued sharp interest rate hikes, the dollar exchange rate has continued to strengthen recently. The dollar index rose sharply on the 11th. The dollar index, which measures the greenback against six major currencies, rose 0.95 percent on the day to close at 108.0220 at the end of the New York currency market, the highest level in nearly 20 years.
Markets expect the Fed to raise rates by another 75 basis points at its monetary policy meeting on July 26-27 to curb inflation. The fed is expected to raise interest rates to 3.5% by March next year, the relevant data shows.
Rye said the Fed is raising rates more aggressively than most other advanced central banks, and that other advanced economy central banks are struggling to keep up.
A survey by the New York Fed shows that U.S. consumers are currently expecting inflation to rise further this year, but growth will slow in the long run. At present, the latest inflation data to be released by the Federal Reserve on the 13th has attracted much attention from the outside world. According to a Reuters survey, U.S. inflation is expected to reach 8.8 percent in June.
The analysis believes that it is only a matter of time before the euro and the dollar can achieve parity, and after the parity conversion, the exchange rate of the euro against the dollar may even continue to fall.
Analysts at ABN AMRO said the tightening cycle of major central banks around the world would continue as the European energy crisis was difficult to improve, and the euro could even fall to $0.95 against the euro in July.