Last Updated: 19 July 2022
The economic outlook for the European Union is deteriorating by the day. While the euro was already on par with the dollar earlier this month, the possible failure of Russian gas deliveries to Germany, Italy’s debt mountain and record inflation may be pushing the continent towards recession.
The European Central Bank is in dire straits
More and more economists are concerned about the ability of Christine Lagarde, a lawyer by profession and not an economist, to rescue Europe from the recession. According to Bas van Geffen, strategist at Rabobank, the European Central Bank (ECB) may find it difficult to maintain its credibility with the new strategy.
The current plan is to use a new tool to counteract the “fragmentation” between Northern and Southern European bonds. The interest rates of the weaker southern European brethren are rising compared to northern Europe and this does not make the situation any better for them. The ECB now hopes to improve this situation with targeted monetary expansion.
Effectively, this means that the ECB will come up with support packages for southern European countries in order to artificially lower their interest rates. “Good luck explaining that you are tightening the monetary thumb screws when you launch a new tool to buy up assets elsewhere in Europe,” Bas van Geffen told the Telegraph.
Italian interest rates skyrocket
Investors are worried that the Italian economy is at risk of going under because of high borrowing costs. In recent weeks, Milan’s stock market has lost billions and 10-year Italian government bond yields have shot up to 3.4 per cent. Only 12 months ago, the interest rate on Italian government bonds was 0.7 percent.
The ECB’s new ‘tool’ allows the central bank to buy more assets from countries facing the biggest interest rate rises. The chart above shows the problems for Italian bonds relative to Germany. To prevent a new debt crisis, the ECB wants to intervene in a targeted way. However, the question is how long the market will take this for granted.
Looking at the euro exchange rate, things are certainly not looking good for the ECB. It remains to be seen how far it will fall. The problem is that the ECB has few other options, as the collapse of an economy like Italy’s is potentially an even bigger problem.
What does this mean for bitcoin?
Inflation in the Eurozone is currently even higher than during the last financial crisis. There is also the issue that the Nord Stream 1 pipeline from Russia to Germany is currently closed for maintenance and subsequent gas deliveries are also lacking. Vladimir Putin therefore seems to have strong cards in hand to push the European Union into recession.
All in all, the ECB will probably have to deal with record inflation, an Italian debt crisis and a huge energy shortage for Germany because of the absence of Russian gas supplies.
The ECB does not seem to have much room to raise interest rates at the moment, which at first glance seems like a ‘positive’ development for bitcoin. However, the question is what will happen to our euro. If interest rates remain at this level for any length of time, which it currently looks like they will, it could have catastrophic consequences for the euro project.