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The headline is "Gas crisis sends euro back below parity against dollar." Yet the article does not explain how a "gas crisis" leads to a weaker currency. What

by yuan43 4y ago

The headline is "Gas crisis sends euro back below parity against dollar." Yet the article does not explain how a "gas crisis" leads to a weaker currency. What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices: https://www.reuters.com/world/europe/german-economic-outlook-gloomy-finance-ministry-says-2022-08-18/ https://www.reuters.com/world/europe/german-economic-outlook... And the ECB has done basically nothing about it. Deeply negative real rates and little indication that the ECB has the stomach for any substantive action. On the US side, there have been sizable interest rate hikes, which will continue at least until the midterm elections get underway. Real rates are still deeply negative. That difference in rates attracts a lot of capital that might otherwise be parked on the EU side. The US doesn't need to be a pillar of financial responsibility to attract the world's capital. It just has to be the cleanest dirty shirt in the hamper.

blibble 4y ago
the euro was supposed to make its constituent economies converge, but the exact opposite happened the only real solutions are: full fiscal union (the EU decides Germany/France/...'s budget, with redistribution) or collapse of the euro
jmnicolas 4y ago
If the ECB raises interest rates most European nations wouldn't be able to pay their debts. It's an untenable situation, something will have to give.
- candiodari 4y ago
  But it's nowhere near the braking point, in fact it isn't nearly as bad as the PBOC or, arguably, the BOJ and the FED (per person EU debt is still less than the US), so they definitely still have the option to kick the can down the road. Ergo, you can safely bet both your kidneys that nothing's going to happen. It's crazy how hard it is to make 1 European country agree on finances these days, all the EU member nations agreeing to seriously tighten is about as likely as the President of the US declaring he is an alien.
  - layer8 4y ago
    Switching to private pensions is difficult because it would only work for the younger part of the population who would still have enough time to save/invest money for their pension, but the state would still have to finance the pensions for the older half for a couple of decades, without getting fresh money in from the younger half. This is made even more difficult by an aging demographics.
- ParksNet 4y ago
  What will have to give is the welfare state. Difficult to see how a retirement age in the early 60's is sustainable given this level of inflation. Better to abandon pensions entirely and just offer disability stipends for those who cannot work due to advanced age. Returning several million net-negative economic migrants to their home regions would also be necessary.
mutatio 4y ago
The ECB has its hands tied behind its back, perfect storms like this highlight one of the benefits of a country having its own currency and fiscal policy - the ECB cannot move like UK/US as reconciling Greece/Italy and Germany/Northern Europe can't be done without massive pain for the south.
- fzfaa 4y ago
  It's time to inflict massive pain for the south. Can't spend any more decades wasting money.
  - odshoifsdhfs 4y ago
    Thank you, we appreciate it. Specially when just a few weeks ago Central Europe wanted the south to be solitary with the rest of Europe and save gas, gas they don't get from Russia and always paid more for. This is why the EU is a stupid idea. When it is the south, they should suffer, when it is Central Europe, everyone should come together and sing kumbaya
    - jacquesm 4y ago
      The EU is a great idea, implemented in a way that leaves a lot to be desired. It certainly is a lot better than what came before, the economic gains are felt everywhere but not equally so. That's the thing that should change, unfortunately such change takes time.
    - iSnow 4y ago
      Not so fast. The ECB should have raised rates like the Fed, but didn't to accommodate the Southern EMU members. If what you are claiming was true, the ECB would have just gone ahead and leave the south to fend for itself. Instead their policy is adding fuel to the inflation inferno to protect the south.
  - jacquesm 4y ago
    They're not wasting money. They simply don't have the massive wealth of the North to jump off from or to cushion blows. On top of that a large quantity of what they do earn is spent on interest payments to the North.
spywaregorilla 4y ago
> the article does not explain how a "gas crisis" leads to a weaker currency. > What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices: The producer prices are rising because of the gas prices
- NoMAD76 4y ago
  Just wanted to add that prices are also rising because of higher transportation costs (sea, land, air), all are on the rise.
paganel 4y ago
> What does lead to a weaker currency? O Much more expensive gas means the German economy goes kaboom, which is exactly what is now happening (afaik Germany recently had the biggest trade deficit in 30 years or something). The EU economy as a whole largely, largely depends on the German economy. The Euro is the currency behind most of that EU economy.
b112 4y ago
Yet the article does not explain how a "gas crisis" leads to a weaker currency. One thing I find weird (a touchy point?) is that the UK left. Yes, that was a few years ago, but my point is historical EU / Euro pricing is now diminished overall, in its up/down cycle. COVID threw this asunder, so we did not see true fiscal results from UK leaving. And the UK left over a few years, making the departure less dramatic. The UK comes in right after Germany: https://www.investopedia.com/insights/worlds-top-economies/ https://www.investopedia.com/insights/worlds-top-economies/ and: https://en.wikipedia.org/wiki/Economy_of_the_European_Union https://en.wikipedia.org/wiki/Economy_of_the_European_Union Comparing the EU (18T) to the UK (3.4T) shows some impact here, around 20%. If the UK was still in the EU, I'd say the Euro wouldn't have dropped below parity. Parity is an "OMG!" marker, and can cause cascading changes in perception to the strength of fiscal objects.
- blibble 4y ago
  the UK never joined the euro the europhiles in the UK attempted the first steps of joining (ERM1), which pegged the pound with the deutschmark it was forced out when George Soros and friends attacked the peg on Black Wednesday immediately prior to this the ERM was known an the Eternal Recession Mechanism (which is now exactly what the euro is)
  - b112 4y ago
    Interesting info, and thanks, but I still contend that a large economic zone shrunk by 20%, and that this has an impact.
- tt293 4y ago
  Because the UK's currency performed so much better against the USD since Brexit than the Euro? Maybe check the facts first.
- notahacker 4y ago
  The UK wasn't in the Euro, and isn't the answer to Europe's issues with gas prices or interest rates. Sterling has fallen similarly against the dollar for the same reasons (and had a larger trend fall from a higher peak in the longer term). Brexit doesn't help anybody with the current situation, but it doesn't have much to do with it.
JacobiX 4y ago
> The headline is "Gas crisis sends euro back below parity against dollar." > Yet the article does not explain how a "gas crisis" leads to a weaker currency. It wasn’t clear (at least for me) why gas has such an impact on the economy as a whole because many articles concentrate the debate on the private households heating only. But currently, most of the gas is used in the industrial sector (chemicals, power supply, food preparation), also for electricity generation and for producing materials such as ammonia, plastics, methanol and hydrogen.
onlyrealcuzzo 4y ago
> Deeply negative real rates and little indication that the ECB has the stomach for any substantive action. You can't have positive real rates AND pump up the real estate bubble. There are two parts to growth - population and actual growth. The majority of "actual" GDP growth for the last 20 years in the West has been people paying more money (inflation adjusted) for the same land. Why? Because you could! Interest only went lower. Positive real yields mean people need to actually work instead of speculate on real estate. Most people would rather just speculate on real estate. It's so much easier. Unfortunately, it's a zero sum game. The losers are renters.
- blablabla123 4y ago
  I agree that the losers are renters, at least for now. Although it does speak volumes that at the current stage professional investors in Germany are expected to shift investments into bonds because the yield will likely be higher. It's still popular with small scale investors but I doubt that many people are really familiar with the possible risks. That said I'm curious how things will develop. Now that U.K. expects up to 18% inflation I wonder if the price-salary-real estate spiral in the metropoles can keep up its momentum.
- nickff 4y ago
  You seem to be implying or assuming that increased real estate prices lead to increased rent, but that's a non-sequitor; in fact, rents have become decoupled from real estate prices in many areas over the past 20 years.
  - Sohcahtoa82 4y ago
    I find this incredibly hard to believe, especially when it's not hard to find people that buy houses for the sole purpose of renting them out[0]. In order to ensure you at least break even in the short term, you'd need to charge a rent at least equal to the mortgage + property tax.
    - onlyrealcuzzo 4y ago
mhh__ 4y ago
With financial news you can basically just say "[current geopolitics] leads to price going [up or down]". Even with a survey of big players markets don't always have a simple interpretation

by yuan43 4y ago

blibble 4y ago

the euro was supposed to make its constituent economies converge, but the exact opposite happened the only real solutions are: full fiscal union (the EU decides Germany/France/...'s budget, with redistribution) or collapse of the euro

jmnicolas 4y ago

If the ECB raises interest rates most European nations wouldn't be able to pay their debts. It's an untenable situation, something will have to give.

candiodari 4y ago
But it's nowhere near the braking point, in fact it isn't nearly as bad as the PBOC or, arguably, the BOJ and the FED (per person EU debt is still less than the US), so they definitely still have the option to kick the can down the road. Ergo, you can safely bet both your kidneys that nothing's going to happen. It's crazy how hard it is to make 1 European country agree on finances these days, all the EU member nations agreeing to seriously tighten is about as likely as the President of the US declaring he is an alien.
- layer8 4y ago
  Switching to private pensions is difficult because it would only work for the younger part of the population who would still have enough time to save/invest money for their pension, but the state would still have to finance the pensions for the older half for a couple of decades, without getting fresh money in from the younger half. This is made even more difficult by an aging demographics.
ParksNet 4y ago
What will have to give is the welfare state. Difficult to see how a retirement age in the early 60's is sustainable given this level of inflation. Better to abandon pensions entirely and just offer disability stipends for those who cannot work due to advanced age. Returning several million net-negative economic migrants to their home regions would also be necessary.

mutatio 4y ago

The ECB has its hands tied behind its back, perfect storms like this highlight one of the benefits of a country having its own currency and fiscal policy - the ECB cannot move like UK/US as reconciling Greece/Italy and Germany/Northern Europe can't be done without massive pain for the south.

fzfaa 4y ago
It's time to inflict massive pain for the south. Can't spend any more decades wasting money.
- odshoifsdhfs 4y ago
  Thank you, we appreciate it. Specially when just a few weeks ago Central Europe wanted the south to be solitary with the rest of Europe and save gas, gas they don't get from Russia and always paid more for. This is why the EU is a stupid idea. When it is the south, they should suffer, when it is Central Europe, everyone should come together and sing kumbaya
  - jacquesm 4y ago
    The EU is a great idea, implemented in a way that leaves a lot to be desired. It certainly is a lot better than what came before, the economic gains are felt everywhere but not equally so. That's the thing that should change, unfortunately such change takes time.
  - iSnow 4y ago
    Not so fast. The ECB should have raised rates like the Fed, but didn't to accommodate the Southern EMU members. If what you are claiming was true, the ECB would have just gone ahead and leave the south to fend for itself. Instead their policy is adding fuel to the inflation inferno to protect the south.
- jacquesm 4y ago
  They're not wasting money. They simply don't have the massive wealth of the North to jump off from or to cushion blows. On top of that a large quantity of what they do earn is spent on interest payments to the North.

spywaregorilla 4y ago

> the article does not explain how a "gas crisis" leads to a weaker currency. > What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices: The producer prices are rising because of the gas prices

NoMAD76 4y ago
Just wanted to add that prices are also rising because of higher transportation costs (sea, land, air), all are on the rise.

paganel 4y ago

> What does lead to a weaker currency? O Much more expensive gas means the German economy goes kaboom, which is exactly what is now happening (afaik Germany recently had the biggest trade deficit in 30 years or something). The EU economy as a whole largely, largely depends on the German economy. The Euro is the currency behind most of that EU economy.

b112 4y ago

Yet the article does not explain how a "gas crisis" leads to a weaker currency. One thing I find weird (a touchy point?) is that the UK left. Yes, that was a few years ago, but my point is historical EU / Euro pricing is now diminished overall, in its up/down cycle. COVID threw this asunder, so we did not see true fiscal results from UK leaving. And the UK left over a few years, making the departure less dramatic. The UK comes in right after Germany: https://www.investopedia.com/insights/worlds-top-economies/ https://www.investopedia.com/insights/worlds-top-economies/ and: https://en.wikipedia.org/wiki/Economy_of_the_European_Union https://en.wikipedia.org/wiki/Economy_of_the_European_Union Comparing the EU (18T) to the UK (3.4T) shows some impact here, around 20%. If the UK was still in the EU, I'd say the Euro wouldn't have dropped below parity. Parity is an "OMG!" marker, and can cause cascading changes in perception to the strength of fiscal objects.

blibble 4y ago
the UK never joined the euro the europhiles in the UK attempted the first steps of joining (ERM1), which pegged the pound with the deutschmark it was forced out when George Soros and friends attacked the peg on Black Wednesday immediately prior to this the ERM was known an the Eternal Recession Mechanism (which is now exactly what the euro is)
- b112 4y ago
  Interesting info, and thanks, but I still contend that a large economic zone shrunk by 20%, and that this has an impact.
tt293 4y ago
Because the UK's currency performed so much better against the USD since Brexit than the Euro? Maybe check the facts first.
notahacker 4y ago
The UK wasn't in the Euro, and isn't the answer to Europe's issues with gas prices or interest rates. Sterling has fallen similarly against the dollar for the same reasons (and had a larger trend fall from a higher peak in the longer term). Brexit doesn't help anybody with the current situation, but it doesn't have much to do with it.

JacobiX 4y ago

> The headline is "Gas crisis sends euro back below parity against dollar." > Yet the article does not explain how a "gas crisis" leads to a weaker currency. It wasn’t clear (at least for me) why gas has such an impact on the economy as a whole because many articles concentrate the debate on the private households heating only. But currently, most of the gas is used in the industrial sector (chemicals, power supply, food preparation), also for electricity generation and for producing materials such as ammonia, plastics, methanol and hydrogen.

onlyrealcuzzo 4y ago

> Deeply negative real rates and little indication that the ECB has the stomach for any substantive action. You can't have positive real rates AND pump up the real estate bubble. There are two parts to growth - population and actual growth. The majority of "actual" GDP growth for the last 20 years in the West has been people paying more money (inflation adjusted) for the same land. Why? Because you could! Interest only went lower. Positive real yields mean people need to actually work instead of speculate on real estate. Most people would rather just speculate on real estate. It's so much easier. Unfortunately, it's a zero sum game. The losers are renters.

blablabla123 4y ago
I agree that the losers are renters, at least for now. Although it does speak volumes that at the current stage professional investors in Germany are expected to shift investments into bonds because the yield will likely be higher. It's still popular with small scale investors but I doubt that many people are really familiar with the possible risks. That said I'm curious how things will develop. Now that U.K. expects up to 18% inflation I wonder if the price-salary-real estate spiral in the metropoles can keep up its momentum.
nickff 4y ago
You seem to be implying or assuming that increased real estate prices lead to increased rent, but that's a non-sequitor; in fact, rents have become decoupled from real estate prices in many areas over the past 20 years.
- Sohcahtoa82 4y ago
  I find this incredibly hard to believe, especially when it's not hard to find people that buy houses for the sole purpose of renting them out[0]. In order to ensure you at least break even in the short term, you'd need to charge a rent at least equal to the mortgage + property tax.
  - onlyrealcuzzo 4y ago

mhh__ 4y ago

With financial news you can basically just say "[current geopolitics] leads to price going [up or down]". Even with a survey of big players markets don't always have a simple interpretation