Trouble in the eurozone

It’s not all gelato and smiles in Europe these days…. economists and business leaders worry that slowdowns in the region’s leading economies could send the eurozone into a recession. 

Driving the news: According to an S&P survey of 5,000 companies in Europe, shrinking business activity—mainly concentrated in Germany and France—may spell trouble. 

Why it’s happening: Russia’s gas supply squeeze sent inflation to record highs (hitting business investment and consumer spending), forcing Europe’s central bank to raise interest rates

  • Usually, interest rate hikes are used to tame an economy that’s running hot–like in Canada and the US–but Europe isn’t seeing the same excess consumer demand.

A slowdown in Germany specifically (which accounts for about a quarter of the European Union’s GDP) could reverse an unexpectedly solid start of the year for the EU economy.

  • Droughts have affected key trade routes, plus Germany is still heavily dependent on Russian energy (which has been less available since the start of the war in Ukraine) to power its homes and manufacturing industry.
  • France, Italy and Spain (the eurozone’s next three biggest economies) also had their growth forecasts for 2030 downgraded by the International Monetary Fund. 

Meanwhile, the 19 European economies underpinned by the euro have seen their currency’s value drop to its lowest levels in 20 years, resulting in parity with the US dollar.  

  • Analysts attribute the euro’s slide to aggressive interest rate hikes by the US Federal Reserve, which has attracted money from euros into US dollar investments.
  • While rates are also going up in Europe, US consumer demand is holding up much better than in the EU, which means the Fed has more room to raise rates even more. 

Why it matters: Some experts are becoming worried that Europe’s troubles could make it the epicentre of a global recession.