The strategy of the European Central Bank (ECB) of choke the economy to stop feeding inflation raises many unknowns. In addition to making it more expensive mortgages and the rest of the loans with increases in official interest rates to "cool down" economic activity and lower prices, the other objective of the institution is to revive the euro.
In the first task, he faces contradictions such as the inability of his decisions to intervene in energy or geopolitical issues, main causes of the inflation crisis, while assuming the risk of favoring a recession and increasing unemployment. In the second purpose, less anti-social, that same uncertainty and the threat of a cut in Russian gas work against it, as well as the different factors that support the strength of the dollar due to the different reality that the United States is experiencing.
The main problem for the eurozone is that imports of oil or gas, resources that are bought in dollars and that have skyrocketed due to the war in Ukraine, become even more expensive due to the depreciation of the 'common currency' from 2021 relative to the US currency. The same is true for other important raw materials for industry or agriculture. And the ECB's rate hike is failing to correct it (in the graph, the case of Spain).
If the euro was exchanged for 1.17 dollars on average in 2021, this year this same calculation remains 8% below to date, at 1.08 dollars. In other words, what is bought in the currency of the United States from Spain or from the rest of the eurozone is more expensive due to the exchange rate between the currencies, without taking into account the historic inflation crisis due to the Russian invasion of Ukraine.
Thus, the ECB's rate hike policy ignores, on the one hand, the origin of the energy inflation crisis and geopolitics, which have little to do with financing conditions. On the other hand, it adds to the end of the debt purchase programs with which it has created money to guarantee demand in the financial markets for years and precisely promote growth and economic recovery.
And, finally, in its basic objective of stopping the fall of the euro, it fails. From the perspective of the United States, this occurs because the Federal Reserve (Fed) has been more aggressive than the ECB in recent months, turning the dollar into a vacuum of money in international markets.
This policy has caused the return offered by the debt denominated in the greenback to rise sharply, as a result of the rise in interest rates on the other side of the Atlantic, where they are already at 2.25%. In the eurozone, two increases have been decided: one of 0.5% in July and another historical one of 0.75% recently, up to 1.25%, and more are expected to continue chasing the Fed.
From the eurozone itself, the public spending effort to fight inflation and make changes in the short term and structures to overcome the energy crisis They suggest that "the ECB will continue to buy state debt", according to Jordan Rochester and Yusuke Miyairi, economists at the investment bank Nomura, one of the main entities in Japan.
In fact, as a sign of its commitment not to allow the conditions of the most over-indebted countries, such as Italy and Spain, to get much worse, it has designed a new mechanism to buy debt under certain conditions, the TPI, and for months it will continue reinvesting money from the previous programs with the same objective. These measures are contradictory to the rise in rates and, therefore, weaken the strength of the euro, according to the experts at Nomura.
In the same vein, they point out that the ECB's rate hikes were expected until now, and that is why they have not revitalized the euro in its crossing with the dollar, and that "declining growth expectations" do not help either. His forecasts are for it to fall "to $0.95 in October and to $0.9 by the end of December."
The ECB itself estimates that the euro will be exchanged for 1.01 dollars in 2023, although for the end of 2022 it is more optimistic and leads the cross to 1.05.
“The best way to see how much things have changed is through the eurozone trade balance, which, after years of surplus [se vendía más de lo que se compraba fuera], it now has a deep deficit,” says Robin Brooks, chief economist at the IIF. A reality that nullifies any benefit due to the gain in competitiveness that the fall of the euro implies.
"The weakness of the euro and the deterioration of the trade balance in the eurozone only makes the problem worse, since it pulls inflation up by increasing the bill for imports," admits Mark Nash, an expert at the manager Jupiter AM. Industry and the rest of the economy spend a lot more on energy than before, and this has led to a historic change in the trade balance.
The industry [en Alemania se están recogiendo datos preocupantes] is suffering according to "the intensity of energy consumption, the degree of exposure to the reactivation of social activities and the severity of supply shortage problems," recall Alejandro Fernández and Elvira Prades, economists at the Bank of Spain.
"Finally, it is worth mentioning that the fact that the Spanish industry has shown a better recent relative evolution compared to that of some of the main European countries would be explained, to a large extent, by the particular productive structure of our manufactures", they continue.
"The weight in the Spanish industry of the textile, clothing, and footwear and leather manufacturing branches —which have evolved more favorably recently, due to the reactivation of social activities— stands at 6.8%, while that in Germany, for example, this percentage is reduced to 1.1%.For its part, the weight in our country of the metallurgy, motor vehicle and chemical branches -which would have been more negatively affected in recent quarters due to its high energy dependency and bottlenecks—it stands at 21% of manufacturing activity as a whole, well below the 30.7% that it represents in Germany", these analysts conclude.
The key for the euro/dollar is that the proposals made in the main bodies of the European Union on the energy market raised "good headlines"although they had a limited impact on the foreign exchange market because they were not more specific, according to the Monex Europe analyst team.
Back in the United States, "continuing pressures on core inflation [las subidas de precios estructurales, que excluyen los elementos más volátiles, como la energía o la alimentación fresca]coupled with the resilience of the US economy, allow the Fed to have 'flexibility to be aggressive' against inflation", they argue in BBVA Research. This is in favor of the dollar, understanding that the US central bank will continue to raise interest rates in coming months.
More positive news for the eurozone is that "Fed members have insisted on the need to keep rates at 'moderately restrictive' levels through 2023, but futures markets continue to price in rate cuts next year," they conclude in the Spanish bank.