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Tuesday, December 06, 2022

Is a new euro crisis looming? Preliminary forecasts see it falling below 90 cm

In the last euro crisis, the Swiss National Bank had to impose a minimum exchange rate against the euro. Now the fear of a new euro crisis is spreading.

24.08.2022, 04:5824.08.2022, 05:54

Niklaus Vontobel / CH Media

The euro is weakening again – on Monday it fell to a new all-time low against the Swiss franc. The price of a single European currency suddenly dropped below 96 cents. Suddenly questions arise. How weak will the euro be? Why is it losing value at all? Why even dollars? And why is the German media curiously asking: “Is there a danger of a new euro crisis?”

The Euro Crisis Could Have A Negative Impact On The Swiss Economy.

The euro crisis could have a negative impact on the Swiss economy.Build: sda

Euro Crisis – This word in Switzerland should get people to pay attention. In the last euro crisis, the European single currency collapsed so quickly that Philipp Hildebrandt, the president of the SNB at the time, had to impose a minimum exchange rate for the euro. A media release from the time stated in 2011: “The current massive overvaluation of the Swiss franc poses a serious threat to the Swiss economy.” Why is the Euro crisis being discussed again? sequentially.

How much will the euro fall?

The euro is “in a seemingly unfathomable descent,” wrote economists at Zucher Cantonalbank on Tuesday. Strategists at US bank Goldman Sachs, on the other hand, believe they look down – but it’s still too low. According to American bankers, the euro may soon be worth only 93 cents – or even 88 cents. Euro exchange rate can be somewhere between high 80 and low 90.

Why is the euro weaker against the franc?

Rates below 90 cents will result in huge loss in value. In June, 1 euro was still worth 104 cents. Then the SNB surprisingly raised its prime interest rate while the ECB was still waiting. It was more worthwhile to invest in Swiss Francs, but less in Euros. Since then, the euro has weakened against the franc.

If Goldman Bankers’ scenario turns out to be true, it will soon lose up to 15 per cent of its value. This would give more importance to Peter Spehler’s statement. Stadler Rail Boss had sharply criticized the SNB interest rate hike:

“I don’t know what they smoked.”

Why is the euro too weak against the dollar?

The euro has become cheaper against the US dollar in 20 years: most recently it was 99 cents. And according to the forecasts of American banks, this is just the beginning. It may soon be 95 cents. At the beginning of the summer, there were headlines in the United States like: “Where to Travel in Europe While the Dollar Is Strong.”

Behind this are prospects for the US and the euro area, which are currently falling apart. In the US, the economy is doing quite well, the labor market is booming too – but inflation is much higher than the US Federal Reserve. So it will likely continue to raise interest rates to spur consumption and moderate inflation. On the other hand, the situation in the Eurozone is far more dire.

On the one hand, inflation is very high – so the ECB will have to significantly increase its key interest rates. On the other hand, if rising energy prices affect consumption, there is a risk of a recession.

By leading indicators, Germany and France are already in recession – so the ECB should not overburden the economy. Given this dilemma, the ECB will raise its key interest rates lower than the US Federal Reserve, at least the financial market believes. And this expectation weakens the euro.

Why is there talk of a “new euro crisis”?

The chronic euro crisis was severe from 2010 to 2012 when some southern European countries went through debt crises. At the time, Italy, Greece and Spain had to pay consistently high interest rates to be able to borrow on the financial markets – they were at risk of national bankruptcy. Due to this crisis, the eurozone seemed to be breaking. The euro fell against the franc, forcing the SNB under then-president Philipp Hildebrand to offer a minimum exchange rate.

In 2011 Introduced A Minimum Exchange Rate For The Euro: Philipp Hildebrandt, Then Snb President.

In 2011 introduced a minimum exchange rate for the euro: Philipp Hildebrandt, then SNB president.Build: Keystone

And now, 10 years later, these interest rates are rising again, especially as Italy will have to pay more. That’s why the German media is already asking: “Is Italy creating a new euro crisis?” High interest payments are a significant burden for the country. And when ECB boss Christine Lagarde called a special meeting in June, the “Bilde-Zeitung” read: “Lagarde fears fragmentation of the euro area.”

Why didn’t SNB intervene long ago?

When the euro was slightly above 102 cents in 2011, the SNB intervened and imposed a minimum exchange rate against the euro. Although the SNB abolished this minimum exchange rate in 2015, it still favored the euro and held it around 110 cents longer. But now he has allowed the euro to fall below 96 cents. One may ask oneself: Why does the SNB just let things run their course? This is partly explained by inflation.

How much does one Euro cost in Swiss Francs:

5969972417133603

Source: ECB, Graphic: STB

Eventually, Swiss products and services become more expensive than the euro falling. But at the same time they have become cheaper compared to 2011 as prices in Switzerland have risen less than in the euro area. So there are two effects that would have to be offset against each other.

For example, due to the weakness of the euro, Swiss ski tickets in the coming winter will be more expensive than Austrian ones. At the same time, however, Austrian Railways has increased its ticket prices much more than its Swiss rivals since 2011.

As the corona crisis subsided, these two effects have almost balanced each other: the difference in inflation on the one hand, and the weakness of the euro on the other. But in the meantime the euro has become too weak for that, wrote Thomas Stuckey, chief investment officer of St. Galler CantonalBank, this week.

If it remains like this until the spring, the weakness of the euro will have an impact on the trading performance of Swiss companies. Until then, at the latest, the call from business will be getting louder that the SNB is doing more. But where the SNB has reached the threshold at which the euro exchange rate will no longer allow things to take their course – that, according to Stucky, “we don’t know”. (aargauerzeitung.ch)

Drafts for the first franc coins

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Drafts for the first franc coins

Source: Swiss Federal Archives

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