×

Euro zone countries could be in danger if euro continues to rise, economist says

  • The recent rise in the euro could put economic recovery in danger
  • "But if there would be an overshoot of the exchange rate then of course they'll have a problem because with their large foreign debt they don't have a second wheel on their machinery."

A euro that continues to rise against the U.S. dollar is now the main danger being posed to fragile euro zone economies that are still recovering after the sovereign debt crisis of 2011, one economist has told CNBC.

Ireland, Portugal and Spain have become some of the fastest growing economies in Europe after receiving help from creditors to restore their finances after the crises that begun in 2011. However, the recent rise in the euro could put their recoveries in danger, according to Daniel Gros, director of the think tank Centre for European Policy Studies, told CNBC Wednesday.

"That is of course the main danger point for them," he said.

"As long as the euro doesn't go much above 1.20 they should be able to continue. But if there would be an overshoot of the exchange rate then of course they'll have a problem because with their large foreign debt they don't have a second wheel on their machinery," Gros said.

The euro rose above the 1.20 level against the greenback on Tuesday on growing geopolitical tensions between North Korea and the U.S. A stronger euro means that European products become more expensive in international markets, which could decrease foreign appetite for European goods and thus hurt EU economies.

Countries like Portugal and Spain owe much of their recovery to exports. In Spain alone, exports have been higher than those of Germany, France and Italy (the biggest EU economies) since last year, according to data collected by TS Lombard.

John Hardy, head of forex trading at Saxo Bank, told CNBC Wednesday that "we have seen a near term peak of sorts triggered as the EURUSD and dollar Index breached key levels, but the pullback suggests the USD weakness has extended too far."

The focus has started to shift towards Frankfurt where European Central Bank President Mario Draghi is due to speak next week, following a monetary policy meeting.

Investors had been hoping to get some indications about the bank's program to exit monetary stimulus but the recent uptick in the euro raises doubts that the ECB will announce such details.

Easy monetary policy suppresses the value of a currency and the potential end of this policy in the euro zone is seen as one of the key reasons why the euro is currently rising. A strong currency also acts as a deflationary pressure at a time when the central bank wants to bring core inflation up in the region.

Speaking exclusively to CNBC on Wednesday, Vice-President of the European Commission Valdis Dombrovskis said that the key element is tracking inflation when trying to predict the ECB's future policy moves.

"The important element here is to monitor the recovery of inflation, whether it's reaching the ECB's target," he said.

"I think this will be the guiding element for (the) ECB to decide at which moment to start readjusting its QE (quantitative easing) program," Dombrovskis, who's responsible for the euro folder at the Commission, told CNBC.

In its latest forecasts, in June, the ECB projected headline inflation at 1.5 percent in 2017 and 1.3 percent in 2018. The bank's target is to see inflation "close but below 2 percent."