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    View: EU recovery fund likely to drive euro’s future

    Synopsis

    Data consumer confidence edged up by 4.1 points in the euro area and 3.9 points in the EU.

    Euro-bccl
    After the coronavirus impacted many European countries severely, a strict lockdown was imposed to curb the spread of the virus.
    By Vaqarjaved Khan

    On a year-to-date basis, the EUR-USD pair has gained 0.75 per cent while EUR-INR has depreciated by around 5.1 per cent. Meanwhile, the dollar index has risen by 0.7 per cent in the same time frame. The appreciation in euro is on account of reopening of EU economies and a possibility of a recovery fund for supporting the Covid-19 hit nations in the region.

    Economic sentiment recovering within the bloc
    After the coronavirus impacted many European countries severely, a strict lockdown was imposed to curb the spread of the virus. These economies emerged victorious and started on a path of gradual recovery and reopening for the economies during the month of May. Most of these economies are highly dependent on tourism and revival in this sector is crucial for the EU’s economic recovery. In the year 2018, tourism contributed 10 per cent to the total GDP of the European Union. Most countries have opened their borders for tourists within the Eurozone and to some countries outside the bloc too.

    Euro snip 1ET CONTRIBUTORS

    With the ease in lockdown restrictions, the economic sentiment in the bloc also started recovering, according to the data published last month. Data consumer confidence edged up by 4.1 points in the euro area and 3.9 points in the EU. However, even with the recent recovery, consumer confidence is still way below its long term average of 11.1 in Eurozone and 10.5 in the EU.

    Economic stimulus the key for future growth
    In the latest ECB monetary policy meeting, the committee decided to boost the pandemic emergency support program by 600 billion Euros to 1.35 trillion Euros in an effort to keep affordable credit flowing into the economy during the downturn caused by Covid-19.

    The large size of the emergency support program also signals that the refinancing rate will also remain low for the foreseeable future. In 2020, the bloc is likely to see a contraction of 8.7 per cent and then a likely rebound of 5.2 per cent in 2021 in a base case scenario according to the ECB officials.

    Meanwhile, a virtual meeting was held among the EU leaders to discuss the 1.85 trillion euro budget proposal. This budget includes 750 billion Euros worth new recovery instrument to help provide economic support to the European economies. It would be financed by a credit that the European Commission takes from the international financial markets. However, Prime Ministers from Netherlands, Austria, Sweden and Denmark opposed this plan.

    Outlook
    The US has partially reopened its economy but complete unlocking of the economy will not be possible at this stage as it might spike cases even further in the country. US Fed officials in their latest meeting had also testified that the second wave of coronavirus cases in the US cannot be ruled out as well.

    The EU recovery fund and the ECB will play a major hand in the recovery of EU nations going forward as record low-interest rates and stimulus would be required to keep the European economies afloat during this crisis.

    US 10 year treasury yields have fallen from 1.4 per cent in February 2020 (pre-pandemic levels) to 0.67 per cent in July 2020 on account of US Federal Reserve slashing interest rates to counter the economic effects of the virus. The Fed has pledged to hold interest rates at 0-0.25 per cent till the end of 2022 to provide the necessary support for the economy to recover. Hence, EUR-INR is likely to move higher towards the 86 mark by the end of July 2020.

    (The author is a Research Analyst at Angel Broking. Views are his own.)



    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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