{"id":2952,"date":"2025-07-31T18:23:51","date_gmt":"2025-07-31T18:23:51","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=2952"},"modified":"2025-07-31T18:23:51","modified_gmt":"2025-07-31T18:23:51","slug":"europe-survived-the-public-debt-crisis-but-the-hard-euro-will-kill-it-export-collapse","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2025\/07\/31\/europe-survived-the-public-debt-crisis-but-the-hard-euro-will-kill-it-export-collapse\/","title":{"rendered":"Europe survived the public debt crisis but the hard euro will kill it – Export collapse"},"content":{"rendered":"\r\n\r\nThe European financial landscape is currently facing a powerful combination of factors that are causing concern in its banking sector and beyond – it has sounded the alarm even though this has not been seen in what the established financial media is reporting.\r\n\r\n \r\n\r\nDespite statements by Brussels officials about an \u201copportunity for the euro\u201d to take advantage of the weakening dollar, the reality is that the European economy, which is facing competitiveness problems in relation to its main trading rivals, the US and China, will be burdened by the appreciation of the euro – with an immediate risk to exports.\r\n\r\n \r\n\r\nThe blow to the largest exporting power, Germany, is expected to be severe in the midst of economic stagnation. On the one hand, the persistent strength of the euro poses a complex challenge for exporters and businesses operating on the continent.\r\n\r\n \r\n\r\nOn the other hand, the escalating imposition of global tariffs is creating further uncertainty and disrupting established trade flows. This convergence of economic pressures is forcing European banks to reassess their strategies and risk management approaches.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nDe facto loss of competitiveness<\/strong>\r\n\r\n \r\n\r\nThe euro, currently trading at high levels, is a double-edged sword for the European economy. While a strong currency can signal economic confidence and make imports cheaper, it also increases the cost of European products for international buyers.\r\n\r\n \r\n\r\nThis directly affects the competitiveness of the continent\u2019s export industries, which are a major growth engine for many European countries.\r\n\r\n \r\n\r\nImpact on Exporters<\/strong>\r\n\r\n \r\n\r\nFor European manufacturers and service providers, a stronger euro means that their products and services become more expensive in foreign markets. This can lead to:\r\n\r\n \r\n
    \r\n \t
  • Reduced Demand: Foreign customers may seek more affordable alternatives from countries with weaker currencies.<\/li>\r\n \r\n \t
  • Lower Profit Margins: To remain competitive, European companies may need to absorb some of the exchange rate difference, leading to reduced profitability.<\/li>\r\n \r\n \t
  • Production Relocation: Some companies may consider relocating production facilities to countries with more favorable exchange rates.<\/li>\r\n<\/ul>\r\n
    \r\n
    \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nBanking Sector Exposure to Exports<\/strong>\r\n\r\n \r\n\r\nEuropean banks have significant exposure to the corporate sector, including many exporters.\r\nWhen these businesses face problems due to currency fluctuations, this can translate into:\r\n\r\n \r\n
      \r\n \t
    • Increased Credit Risk:<\/em> Companies struggling with reduced demand and compressed margins may find it difficult to service their debts, raising concerns about non-performing loans.<\/li>\r\n \r\n \t
    • Reduced Lending Opportunities:<\/em> As businesses face economic uncertainty, their demand for new loans and investment capital may decline.<\/li>\r\n \r\n \t
    • Impact on Investment Banking<\/em>: A more challenging economic climate can reduce the appetite for mergers, acquisitions and initial public offerings, affecting investment banking divisions\u2019 revenue streams.<\/li>\r\n<\/ul>\r\n \r\n\r\nShare of euro area investment portfolios located in the US.\r\n\r\n \r\n\r\nThe Global Trade War and the ECB\u2019s Monetary Measures<\/strong>\r\n\r\n \r\n\r\nTariffs, essentially taxes on imported goods, are a tool that governments use to protect domestic industries, raise revenue, or exert political leverage. However, in today\u2019s global environment, tariffs lead to increased trade tensions and economic uncertainty.\r\n\r\n \r\n\r\nAfter easing its policy by 200 basis points since last June, the European Central Bank (ECB) left interest rates unchanged this week. At 2%, the deposit rate is right in the middle of its neutral range of 1.5% to 2.5% \u2013 which is considered neither too restrictive nor too supportive \u2013 giving the Governing Council a chance to take a breather and then reassess the situation on September 11.\r\n\r\n \r\n\r\nOf course, as Christine Lagarde reiterated several times during her last press conference, the economic environment is currently \u201chighly uncertain\u201d and will remain so as long as global trade tensions persist. So while policy is currently \u201cwell placed,\u201d further easing may well be required later in the year to help keep the recovery on track. So what could trigger action from the European Central Bank?\r\n\r\n \r\n\r\nAs has been the case since March, the ECB is uncertain about how the new normal for global trade will shape itself over a 2-3 year forecast horizon. In the baseline scenario published by the ECB in June, US tariffs on imported goods would be around 10 percentage points higher than last year (20% higher for goods from China) and the EU would not retaliate.\r\n\r\n \r\n\r\nHowever, a more \u201csevere\u201d alternative scenario involving retaliation is also entirely possible. This, according to the ECB\u2019s estimates, could reduce eurozone GDP by around 1 percentage point compared to the baseline scenario, and would put pressure on the Governing Council to respond.\r\n\r\n \r\n\r\nIn addition to what might happen to tariffs and trade flows, the ECB is also increasingly focusing on capital flows and the exchange rate.\r\n\r\n \r\n\r\nThe benefits for the US of a weak dollar<\/strong>\r\n\r\n \r\n\r\nThe US government seems to welcome a weak dollar. And, for now, the ECB is putting up with things and continuing to use its standard coded language of \u201cwe are not targeting the exchange rate.\u201d\r\n\r\n \r\n\r\nEuropean Central Bank Vice President De Guindos also said that if the euro rises above $1.20 (currently at $1.175), this could prove difficult for the Governing Council. This much more candid statement suggests that, as some of the domestic inflation measures continue to decline, the Governing Council\u2019s patience with the euro\u2019s strength is starting to wear thin \u2013 and any significant further appreciation will require a reaction.\r\n\r\n \r\n\r\nThe \u201cExcess\u201d of the Dollar and the Rise of the Euro<\/strong>\r\n\r\n \r\n\r\nThe dollar\u2019s role as the world\u2019s reserve currency gives the United States an \u201cexcessive privilege\u201d \u2013 a term begrudgingly coined by a French politician, Val\u00e9ry Giscard d\u2019Estaing, in the 1960s. Because investors, governments and central banks around the world seek the safe, predictable returns of dollar-denominated assets such as Treasury bonds, there is a strong, built-in demand for dollars. This makes it easier for the U.S. government to borrow and boosts the purchasing power of American consumers.\r\n\r\n \r\n\r\nThe eurozone, which consists of the 20 countries that use the euro and rivals the United States in size and wealth, has never attracted investors in the same way. The euro ranks a distant second to the dollar in global use.\r\n\r\n \r\n\r\nThe euro\u2019s recent rally is a significant reversal from just three years ago, when it fell to parity with the dollar as investors feared damage from galloping inflation and Russia\u2019s invasion of Ukraine. And it\u2019s a far cry from the eurozone debt crisis of the past decade, when the monetary union at times seemed in danger of collapsing.\r\n\r\n \r\n\r\nAs welcome as the euro\u2019s recovery from those episodes has been \u2013 the euro is trading near historic highs against the currencies of dozens of major trading partners \u2013 it\u2019s also possible to have too much of a good thing.\r\n\r\n \r\n\r\nThe Impact of Euro Appreciation on European Exports<\/strong>\r\n\r\n \r\n\r\nAs money flows into the euro and into euro-denominated assets such as German government bonds, economists and executives warn that the currency\u2019s strength could hurt exporters.\r\n\r\n \r\n\r\nThey are already facing Trump\u2019s tariffs, which make their products more expensive for buyers abroad, as well as increased competition from Chinese rivals in key markets.\r\n\r\n \r\n\r\nExports were already likely to weaken and slow the eurozone economy because of U.S. tariffs and European government policies that would encourage more imports.\r\n\r\n \r\n\r\nThe Trade War Chain Reaction<\/strong>\r\n\r\n \r\n\r\nWhen one country imposes tariffs, it often triggers retaliatory measures from others, leading to a chain reaction known as a trade war. This disrupts established supply chains and increases the cost of goods for both consumers and businesses.\r\n\r\n \r\n\r\nFor European banks, this translates into:\r\n\r\n \r\n
        \r\n \t
      • Increased Volatility in Financial Markets: <\/em>Trade disputes cause uncertainty, leading to fluctuations in stock markets, currency values, and commodity prices.<\/li>\r\n \r\n \t
      • Disruption of Corporate Supply Chains: <\/em>Many European companies rely on global supply chains.<\/li>\r\n \r\n \t
      • Tariffs can make importing essential components more expensive or even impossible, forcing them to find alternative, often more expensive, suppliers.<\/li>\r\n<\/ul>\r\n \r\n\r\n \r\n\r\n \r\n\r\nCompanies warn<\/strong>\r\n\r\n \r\n\r\nSome major European companies have warned about the impact of a strong currency on their profits, especially in export-oriented Germany.\r\n\r\n \r\n\r\nSAP, a software company that recently became Europe\u2019s most valuable public company, said that every one cent increase in the euro-dollar exchange rate results in a 30 million euro drop in revenue, without currency hedging.\r\n\r\n \r\n\r\nAdidas, the sportswear brand, said a strong euro had \u201cnegative conversion effects\u201d on its overseas sales.\r\n\r\n \r\n\r\nDaimler, the truck maker, said that fluctuations in the euro-dollar exchange rate \u201ccould significantly affect\u201d its financial performance.\r\n\r\n \r\n\r\nThere is no monetary policy plan to deal with this particular weak dollar situation.\r\n\r\n \r\n\r\nDonald Trump\u2019s strategy of reducing US trade deficits and reviving domestic manufacturing serves his country\u2019s national interests. In this new environment, there is no European response \u2013 at the risk of destroying the European economy \u2013 and southern European member states like Greece will simply find themselves caught in the middle of the storm\u2026\r\n\r\n","protected":false},"excerpt":{"rendered":"

        The European financial landscape is currently facing a powerful combination of factors that are causing concern in its banking sector and beyond – it has sounded the alarm even though this has not been seen in what the established financial media is reporting. Despite statements by Brussels officials about an \u201copportunity for the euro\u201d to … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19],"tags":[738,640,752,72,600,180],"class_list":["post-2952","post","type-post","status-publish","format-standard","hentry","category-economics","tag-competitiveness","tag-donald-trump","tag-euro","tag-eurozone","tag-exports","tag-trade-war"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/comments?post=2952"}],"version-history":[{"count":1,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2952\/revisions"}],"predecessor-version":[{"id":2953,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/posts\/2952\/revisions\/2953"}],"wp:attachment":[{"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/media?parent=2952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/categories?post=2952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trusteconomics.eu\/index.php\/wp-json\/wp\/v2\/tags?post=2952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}