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ECONOMY

Euro could collapse in ‘three to six months’

The euro will collapse in the next three to six months if nothing dramatic is undertaken to save it, according to a leading German economist, who has called for fast and decisive action.

Euro could collapse in 'three to six months'
Photo: DPA

Gustav Horn, director of the Macroeconomic Policy Institute (IMK) in Düsseldorf, told the business daily Handelsblatt on Thursday one possibility would be for the European Central Bank (ECB) to reduce interest rates for crisis-hit countries down to a more sustainable level.

But he also said the International Monetary Fund (IMF) could step in to help, although he admitted this would increase the influence of the US, Japan and China on European economic matters.

“I give the euro three to six months if nothing happens,” he told the paper.

The ECB action “could happen quickly and would, under current circumstances, not create any danger of inflation,” he said.

It would be preferable to intervention of the IMF, as that “would equate to an admission of the eurozone being unable to solve its own problems,” said Horn.

Other voices are also calling for the ECB to act, with Hans-Peter Grüner, a former advisor to the bank, telling the Handelsblatt an intervention now would save the ECB from having to take action in “secondary markets”.

“But I do not think the ECB should categorically rule out further interventions in secondary markets. Those who speculate against Italy will probably have to deal with the EFSF and the ECB,” he said.

He said the EFSF – the European Financial Stability Facility – rescue fund would be able to stop the debt crisis from spreading if it was leveraged further – and also called for the IMF to contribute to the fund.

Horn’s dramatic warning is not the most alarming – last week the weekly Economist magazine said in a comment piece that the currency could have just weeks left.

“Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up with weeks,” it said.

The Local/hc

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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