Only the coming time will show us the picture of debt scenario in Europe. We will get to know in coming times that whether things are settled, or it is going worse. Whatever the case will be, the shocking thing is that the debt issue which struck the Greece has now spread its wings in the Spain. This issue isn’t small as it may look like and hence some serious efforts are needed at this point of time.
The issue isn’t small because out of 10 most successful economies in the world, four are using the euro in their economy. According to a rough estimation, more than 330 million European use this currency in their daily routine. Euro is also known as the second largest currency to be used in reserves. This is because almost one-quarter of the world’s reserves is carried on in the Euros.
Step 1- The panic situation:
The first thing that is being observed after the debt issue is that it has caused the situation of unrest throughout the Europe. Investors are the individuals who are creating the chaos. Assuming that market players are generally involved in the chaos, this would surely mean that some bad days are coming for the international stock markets and will bring a slight lower interest rate in the U.S market. This situation will bring shock in the market around the globe. European countries like Germany, Britain, and Denmark might observe the slump in the value of euro.
Step 2- Investing more with same return
Due to the financial crises, it seems like the euro will fade away now. In this situation, the cost of starting a business in Europe will go higher. Since companies will look toward banks this would mean that the transaction cost will be charged higher. As a result, the only option left for companies is to sell more products outside Europe to raise their profit.
Along with that, the risk factor will also increase because all the transactions will involve multiple currencies. On the other hand, some chief financial instruments like bonds and stocks that currently have a higher liquidity if traded in Euros would surely receive a decline position.
Step 3- Decrease in growth
As soon as euro will start to fade, it will strengthen the dollar. Countries that were using the Euros for their reserves now they would likely to use German currency. Since the reserves will now be capitalized in another currency, it would give boast to the dollar. Although this may seem a fair situation, but eventually it will cause problems for exporters within Europe.
In the longer run, Europe is likely to face a decrease in the growth. Now, a lot of European countries are facing a very low interest rate, but it won’t be the similar situation in the future. As the individual currencies will prevail across Europe, and this would mean an increase in the interest rate.
The bottom line
Although few countries like France, Germany, and the Netherlands wants to carry on their support for the Euro, but Germany seems to lose its patience. This is because Germany is among those countries whose exports are benefited from euro. It’s too difficult to predict how things will move on from here. However, we just hope this turmoil will end soon.
As we can see EUR/USD is in bearish trend. From 1.455 2 weeks ago, EUR/USD is on 1.35 right now.