The escalation of the energy crisis with Moscow's aggressive, albeit predictable, decision to close the Nord Stream 1 pipeline indefinitely has led to a new fall in the euro, this time below 99 cents on the dollar. After two decades, the single currency fell 0.7% yesterday morning to 98.80 cents to the dollar, reflecting gloomy market assessments of Europe's energy security and the looming recession on the Old Continent.
Although Gazprom, as is its usual practice, cited a technical problem, the news broke a few hours after the G7 countries announced their plan to impose a price cap on Russian oil sales, partly as a measure to deal with the energy crisis and partly to hurt Moscow's revenues with which it is financing the invasion of Ukraine. As it is now translating into continued pressure on the euro, the energy crisis is now also complicating the work of the ECB, which is expected to aggressively raise interest rates to deal with inflation.
The reaction of European countries was immediate, with Germany leading the way, as they rushed over the weekend to announce measures to stem the rise in energy prices and the cost of living in general. In a move that betrays the seriousness of the issue, Germany announced on Sunday a program of support for households and businesses totaling EUR 65 billion and Finland a similar program of EUR 10 billion. This was followed on Saturday by Sweden, which announced a 23 billion package of measures to support utility companies. And Goldman Sachs predicts the euro will fall to 97 cents to the dollar over the next three months and remain below the one-to-one exchange rate for a period of six months. The estimates are, moreover, ominous for Europe as the shortage of energy resources portends a long and difficult winter for the Old Continent and its economy, while the ECB is forced to raise interest rates.
Speaking to the Financial Times, Brian Martin, head of economic research at ANZ, said that "the ECB's task is significantly complicated by the uncertainty surrounding the supply of Russian gas". He added that the market has already discounted a 0.5 percentage point increase in interest rates, but "Moscow's decision to indefinitely shut off the fuel supply increases the risk of a recession and the possibility of accelerating inflation." Similarly Rodrigo Catril, a foreign exchange analyst at National Australia Bank, said that "the lack of gas means a lack of growth and also means that the ECB's monetary policy will be restrictive."
Among market participants, expectations of a 75 basis point increase in ECB interest rates at Thursday's meeting are steadily strengthening. At the same time, however, analysts and economists stress that it is extremely difficult for the Bank to make a decision on the matter, as President Christine Lagarde and her colleagues have to manage the twin problems of inflation and the pregnant recession.
As Sue Lynn Ong, head of the investment strategy at Royal Bank of Canada, points out to Bloomberg, "at some point banks will start asking how much inflation central banks are willing to tolerate if economies slip into recession." She stressed that "the price that will ultimately be paid will be weaker growth or recession and deteriorating labor market conditions", but added that "as long as energy prices remain high for too long, they limit the ECB's room for maneuver both at this week's meeting and more generally".
[This article was translated from its Greek original]