Investment capital is fleeing Europe

International Business News  –  In the past six months of the Russian-Ukrainian conflict, investment funds are fleeing Europe, which has been plagued by higher resource prices. The currency, the euro, hit its lowest point in about 20 years, and the total market value of equities fell the most among major regions, wiping $3.6 trillion off. Germany, which belongs to its European roots, has suffered, while in southern Europe, the risk of fiscal deterioration due to rising interest rates and the like is also increasing. Whether the European Union (EU) can remain united in the face of Russia while maintaining economic stability comes into focus.

“Perhaps in the world, the European economy will be the first to stall. A lot of investors are betting on the devaluation of the euro and are selling the euro (before),” explained Greg Anderson of BMO Capital Markets.

The rapid devaluation of the euro is a symbol of Europe’s predicament. The euro exchange rate, which hovered around $1.13 per euro on February 23, fell below parity between the euro and the dollar for the first time in about 20 years in July. In August, when the risk of gas supply disruptions reignited, the euro fell below parity again, hitting new lows.

Comparing the pre-Russian-Ukrainian conflict with August 24, the euro depreciated 12% against the dollar, approaching the yen (16% depreciation) driven by monetary easing by the Bank of Japan (central bank) and targeted by speculative funds. In Europe, the European Central Bank (ECB) started raising interest rates after a lapse of 10 years, but due to economic concerns, the depreciation of the euro has not yet been put on the brakes.

Currency depreciation can help boost Germany’s exports to the European economy, which should have been a tailwind for stock prices. However, Germany’s share price index (DAX) fell nearly 10%, outperforming the US Dow 30 industrial average by a wide margin (down 0.5%). The Polish stock market, which has close ties to Germany, also fell sharply. The total market value of European equities fell by $3.6 trillion in half a year. The reduction is outstanding compared to China ($1.7 trillion) and the United States ($1.5 trillion).

There is a serious energy problem behind the simultaneous appearance of currency devaluation and stock price decline.

In Europe, the risk of depleting natural gas inventories in 2023 has been pointed to as supplies of natural gas imported from Russia, which it has been reliant on, have declined. The Dutch TTF, an indicator of natural gas prices, rose to 300 euros per megawatt-hour on Aug. 24, a record high at closing prices, according to financial information firm Refinitiv. It once rose to 330 euros on the 25th, and went further higher, and is approaching the all-time high price (335 euros) set in the intraday in early March.