Economic Effects of the Eurozone Debt Crisis

A more technical look at the markets from InterTrader.

When you watch the news headlines proclaiming yet another debt crisis in yet another European country, you inevitably wonder how this will affect Europe in the long run. Will the EU ever return to its former self or will the Eurozone debt crisis change it forever?

Recently Angela Merkel, the German Chancellor, declared, “This debt crisis will not simply go away”, adding, “It will certainly be a decade before we are in a better position”.

She warned that Europe faces being crippled by debt for at least the next ten years, with dire consequences for its 500 million inhabitants, including Britons.

At the same time, economic experts predicted that the debt crisis would set back Britain’s economy by six years.

Eurozone Debt Crisis – Effects on the Individual

What we are likely to see during the next decade is continued austerity measures by European governments in order to keep public spending at bay and repay their huge debts.

This inevitably means reduced public spending on infrastructure, social projects, health and probably the military.

For the individual it will mean a decade of stagnation in public services, if not decline.

Social pensions will most likely not increase in line with the cost of living and the quality of government services may not live up to expectations.

Credit will remain hard to come by as banks lick their wounds after suffering huge losses. Individuals will find it harder than ever to buy a home of their own or even a new car.

Eurozone Debt Crisis – Economic Effects

In a sense, we will therefore see a reversal of the situation that caused the problem in the first place.

Instead of a spending bubble, we will see a contraction in spending, which will in turn have a negative effect on economic activity and job creation.

We can also expect property prices to further stagnate or even decline during the next few years.

In the UK, we are already experiencing the emergence of what some refer to as ‘generation rent’, an entire generation of people unable to afford their own homes.

The rental industry will consequently experience continued growth in demand, with rent increases virtually inevitable.

Even if it does becomes cheaper to buy a home than to rent one, it will not help most people, since they will not qualify for a mortgage to begin with.

Eurozone Debt Crisis – Political Consequences

The harsh austerity measures imposed by some European governments will most likely continue to create political instability.

This will be especially true because many of the people carrying the brunt of these measures played no role in creating the crisis in the first place; civil servants, the elderly and the unemployed.

Eurozone Debt Crisis – Forex Spread Betting Markets

The increased austerity measures to come will no doubt have an effect on the spread betting markets, including the prices of forex pairs, stock market indices, shares, and commodities.

Since low levels of economic activity result in lower profits we cannot realistically look forward to a period of high share prices on European stock markets.

This, however, does not rule out short-term price ‘booms’ caused by speculation and overreaction to even the slightest hint of positive news to reach the spread betting markets.

On the forex spread betting markets, the euro will most likely remain depressed.

A picture is worth a thousand words they say, and the chart below tells its own story. This is a weekly candlestick chart of the EUR/JPY pair over the past two and a half years, and the long-term decline is obvious to see at a glance.

Right now the price is below the Ichimoku cloud, both the blue Kijun Sen and red Tenkan Sen lines are below the cloud, and the green Chinkou Span line is much less than the price of 26 periods ago. This confirms that we are in the middle of a bear phase, with no end in sight.




Good luck and happy trading

Shai Heffetz, InterTrader

(Original article written 24 November 2011).

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