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A nightmare scenario for the Euro-zone and Switzerland

After a couple of strong years with high growth the recent economic data from the Eurozone are sobering. After all, no one expects for the whole economy, so far, with a soon to occur recession. But what happens when it comes to such, or to an even worse crisis? This question, Economists at the banking giant UBS, are investigated in a new study. The theme has a special relevance, because the Eurozone is by far our most important trading partner, because the policy of the Swiss national Bank is closely related to those of the European Central Bank and because of the Migration from the EU is heavily dependent on the development of the economy.

the authors of The study have drawn up three scenarios for economic development. Only in a scenario of no recession and a normalization of monetary policy. Another scenario plays out the consequences of a mild recession, and the last revolves around the consequences of a disaster to the extent of the financial crisis of 2008, with a slump in the economy to a total of 6 to 7 percentage points, about one and a half years.

The trigger comes from the world economy

None of the scenarios is to be understood as a forecast, but Economists expect rather a further weakening of the Eurozone in the next few years. The trigger for the, however, you see not in the Eurozone itself, but in other parts of the world. A further slowdown in China could be a reason or a recession in the United States. That it could come to such a until the end of 2021, so the majority of the Economists expects according to the study.

Depending on the extent of a recession in the Euro zone, the UBS Economists calculated consequences of the developments that we have at the peak of the Euro crisis in the years from 2010 to 2012, as at times, the existence of the Euro into question state the same. Reason is a far-reaching, was to be able to collapse of confidence in the governments of the southern countries of the monetary Union, their debt. For this reason, these countries always have higher interest to pay premiums for their debt, which has adversely affected their debt sustainability.

Only the decisive Intervention of Mario Draghi, the head of the European Central Bank (ECB) has stabilized the situation again. Famous for his statement that he will do whatever is necessary to save the Eurozone is to become at that time. This meant that the ECB, in case of emergency and under conditions of would buy, without limit, the government bonds of endangered countries, so that they are not driven due to otherwise unlimited increasing risk premiums on their interest in the Ruin.

the reforms provided stability

Since that time, the Eurozone economy has grown strongly, and a number of other conditions have improved: very much less of the member countries of the deficits in the foreign trade, and where they still exist, are you like the most. The Same is true for the government deficits of the member countries. But that had less to do with fundamental political reforms rather than in a better economy. Have benefited the Europeans in recent times, especially from a good situation in the world economy. The fact that the trade surplus of the monetary Union has risen since the Euro crisis, by 2017, every year, and in the above-mentioned lower proportion of the countries, the external trade deficits. Against an all-clear, the fact that the debt of the Euro countries is still extraordinarily high and speaks. Only eight out of a total of 19 Eurozone member countries, the public debt is below 60 percent, as measured by the gross domestic product – about the brand you are not expected to rise in accordance with the rules of the currency Union.

The great importance of the world economy for the economic development of the Euro-zone and explains why the UBS Economists locating the trigger of a crisis outside of Europe. They stress that, in addition to the United States and especially emerging countries have a very big importance for the Europeans. The export share of these countries on the Eurozone's GDP is twice as high as that of the US. The banks are exposed to these countries is almost three times as much Expo as those of the Americans.

is likely to break into a renewed severe recession in the Eurozone, as last Time the level of confidence in the solvency of heavily indebted countries. What comes in comparison to the last Time, worsening this is the fact that the European one except the Central Bank has followed already usually expansionary monetary policy including negative interest rates on deposits by banks on their accounts. Of your options, helping to intervene, are therefore lower than during the Euro crisis. The planned purchase of government bonds of countries in crisis, pushes in addition to great resistance from the countries in the richer North, as well as legal hurdles.

debt spiral

in a crisis, the public deficits will rise, threatening once again the location for already highly indebted countries is again dangerous. This applies to Greece, even large member countries such as Italy, but also France, whose gross debt is measured by the gross domestic product to nearly 100 percent; in Italy, there are more than 130 per cent, in the smaller Greece almost 180 percent.

Greece-traded government debt agencies have a rating already a Rating that is only slightly above the Status of junk bonds, in the technical language this means that you do not have investment grade. Those of Italy are not that far away, and there is a Gradation threatens. Bonds with such a deep credit Rating may not be held by institutional investors such as pension funds, and the ECB is not allowed to buy them. A Gradation below the investment grade would lead to an avalanche of sales to trigger and lead to an Explosion of interest costs. The willingness of the richer Euro countries to help out, is likely to fall because they would fear to risk by granting loans – for aid packages – yourself a credit Rating downgrade.

it Should come to a crisis with such consequences, is likely to, according to the UBS Economists, to reduce the ECB interest rates further into negative area, and also other measures superior to, the currently no-one thinks is possible – up to the devaluation of cash, such as the Economists at the International monetary Fund already have planned. The willingness to take such an extreme approach is likely to rise when other Central banks, like the Fed in the United States, in turn reduces interest, because the assumption is that the crisis of the development of the world is running out of economy. Without the extreme measures taken by the ECB, the Euro's appreciation, which would further exacerbate the situation for the currency Union even more threatening otherwise. In view of such circumstances, it is expected according to the study, with a significant influx of populist parties.

Switzerland could not escape

In the case of Switzerland. The national Bank would, in accordance with UBS-not Economists, to reduce its key interest rate further into the Negative. As at the time of the Euro crisis, the threat of a strong appreciation of the Swiss franc would be, given its function as a safe haven, alone, including the Swiss exporters to suffer. At the same time they would but they also suffer from the reduced demand in the face of a weak world economy and the crisis in the Eurozone.

That there is such a bad development, that is anything but safe. Also, the UBS Economists do not predict the. Their study, however, makes clear how small the room for manoeuvre in the Euro countries and the ECB in a further crisis is – and how strong Switzerland remains from their development. (

Created: 11.04.2019, 20:17 PM

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