The euro hit the lowest level in 2 years last week which is signalling towards a deepening stagflation and weak confidence being maintained in the European Union. The crisis has been worsening as more and more countries are coming forward asking for a bailout package and the contagion that was once feared has been going on slowly but surely.
At this point, it is a waiting game where investors are more cautious rather than looking to go long in any of the markets. The low yields on the bonds being issued by the stronger economies shows that markets are erring to be safe rather than sorry and are not prepared to take a risk in the market currently. The fall in the currency value came on the back of German Chancellor Angela Merkel’s strong stance towards the measures that have been carried out till now.
The economic indicators that have been released in the recent past signal towards a constant price level which decreases current concerns of the inflation being worrisome. However, the rising unemployment is a cause of a greater concern which could plummet the region into a downward spiral. The investor confidence in Germany itself has been falling and there is an expected fall further when new data is released tomorrow. The issue in Germany right now is a tough balancing act. On one side, Merkel has the task of appeasing the people in her own country and show that a hard stance is being taken against the debt stricken countries. This is necessary to show that failure and lack of controls is not rewarded and that there is no easy way out in these circumstances. On the other hand, she has the tough job of sustaining the European system and to save the economic bloc from a crisis which will have deep and prolonged effect on the country itself.
A weakened stimulus or at least a long awaited and needed signal can come from US in this regard where the Fed is to issue the necessary quantitative measures to ease the burden on the economy. The last two quarters have shown that there is pressure on the teetering economy and that a much needed stimulus is required to jump start the economy again. Brazil and South Korea have already seen a cut in interest rates while Japan also carried out an asset purchase much like US to support the economy. China and EU have also cut the interest rates in recent months doing everything in their power to slay the dragon of recession which seems to be rising from the ashes again.