Weak euro to continue sharp fall while crisis in Ukraine escalates

The sharp fall of the euro is likely to continue as uncertainties over the Russia-Ukraine conflict escalate, forcing the European Union to lower its growth forecast while inflation in the group spikes, partly due to disruptions in gas supplies and successive increases in US interest rates.

The value of the euro dropped below the psychologically important parity level of the US dollar early last week for the first time in 20 years.

The European Commission predicted in its summer economic forecast on Thursday that the EU's gross domestic product will grow at 2.7 percent this year, the same as in the spring forecast in May. But the growth forecast for 2023 was lowered by 0.8 percentage point to 1.5 percent.

Inflation in the EU is expected to hit 8.3 percent this year and 4.6 percent in 2023. Both figures are higher than the spring forecast.

European Commissioner for the Economy Paolo Gentiloni said the depreciation of the euro is mostly because of the rise in the US dollar. However, he added, the euro remains stronger than before against other currencies such as the British pound and Japanese yen.

He said that the euro falling lower than the dollar may help European exports, but "overall we can't consider it a positive factor".The euro has lost more than 12 percent against the dollar this year.

Gentiloni expressed concern that if Russian gas supplies are fully cut off while there is limited possibility of substitution in the short term, the EU economy could be brought into recession over the second half of the year and it would further depress economic activity next year.

"In light of recent events, this risk has become more than just a hypothetical scenario, for which we need to prepare. So a storm is possible, but we are not there at the moment," he said at the news conference on presenting the summer forecast.

Nord Stream 1, the world's longest undersea gas pipeline, started a 10-day maintenance shutdown last week. Russian gas supplier Gazprom said on Saturday that it had asked Siemens for details about the return of a turbine being serviced in Canada for the pipeline.

Germany and many other EU states are hoping for an early resumption of Russia's gas supply, something that Gazprom said it could not guarantee.

The market mood has soured, with some financial analysts expecting the euro to fall to as low as $0.90 to 1 euro if gas supplies are disrupted further.

Robin Brooks, chief economist at the Institute of International Finance, said the markets are playing catch-up to the Russia-Ukraine conflict, which is bringing the possibility of a recession to the eurozone. "The fall in the euro has only just begun," he said in a tweet on Sunday.

Ding Chun, director of the Center for European Studies at Fudan University and a professor at Fudan's World Economic Research Institute, described the euro falling below parity as a result of multiple factors, such as the continuing Russia-Ukraine conflict, the energy crisis, high inflation, the increases in interest rates by the United States Federal Reserve and the dilemma of the European Central Bank over higher inflation and raising interest rates as well.

The European Central Bank is expected to announce its decision to raise rates by 25 basis points on Thursday, its first rate hike since 2011, in a bid to fight inflation. However, there is concern that an overly aggressive policy in Europe could exacerbate a possible recession.

chenweihua@chinadaily.com.cn