OPINION: Rupee exchange rate against the Euro may improve to 86 in the near term

• All the European Union (EU) countries were undergoing severe output losses as a consequence of the COVID-19 crisis out of which southern EU countries suffered even more than some northern countries.
• The EU leaders endorsed a €540 billion package of three safety nets for workers, businesses and member states in the month of April 2020.
• Reasons for the uneven deterioration could be blamed on the severity of lockdown measures, the share of tourism in the economy and the quality of governance.

The year 2020 had introduced Covid-19 virus into our lives upending it fully. Out of all the damages that the virus had caused, one of the largest impacts was on the economy, which suffered its most significant setback since the Great Depression. While comparing with the global economy, the Euro-zone member nations had experienced a larger hit in 2020, as per an economic survey. All the European Union countries were undergoing severe output losses as a consequence of the Covid-19 crisis out of which southern EU countries suffered even more than some northern countries. Reasons for the uneven deteriorations could be blamed on the severity of lockdown measures, the share of tourism in the economy and the quality of governance. From the below chart we can observe that the sharpest decreases since the time series started in 1995 were observed in the second quarter of 2020 (-11.5% in the euro area and -11.1% in the EU).

To counter the above chaos in the zone, EU leaders agreed on the four priority areas i.e. limiting the spread of the virus, ensuring the provision of medical equipment, promoting research for treatments/vaccines and lastly supporting jobs, businesses and the economy. With respect to the fourth priority, the EU leaders endorsed a €540 billion package of three safety nets for workers, businesses and member states in the month of April 2020. They also took action to redirect EU funds to help member states and increased flexibility in the use of structural funds that allowed member states to transfer money between different funds and regions to meet their needs in mitigating the social and economic damage of the pandemic. Not only this, the member nations were given the liberty to request up to 100% financing from the EU budget for dealing with the impact of the Covid-19. Also, the EU state aid rules were relaxed so that governments could provide liquidity to the economy.

In addition to the above measures, the EU leaders agreed on a Recovery and Resilience Fund (RFF) that would help all the member nations of EU countries especially the ones that were hit the hardest. The proposal was presented by the European Commission in May 2020 and by July 2020 the EU leaders agreed on a €750 billion recovery package that was going through the legislative steps to be ready in 2021. Together with the €540 billion of funds, the overall EU's recovery package amounts to €2364.3 billion. Due to the measures, the EU economy rebounded in the third quarter of 2020.

On the contrary, in terms of vaccinations the EU lagged behind the US. Due to this, seasonally adjusted GDP for the 1st Quarter of 2021 decreased by 0.3% in the euro area and by 0.1% in the EU compared with the previous quarter. The decline follow falls in the fourth quarter of 2020 (-0.6% in the euro area and -0.4% in the EU) after a strong rebound in the third quarter of 2020.

To control the economic damage, the EU decided to unlock its first recovery funds amid growing Delta fears in July 2021. Member nations like Austria, Belgium, Denmark, France, Germany, Greece, Italy, Latvia, Luxembourg, Portugal, Slovakia and Spain have finally got the green signal to use the recovery and resilience funds to boost their economies from the Covid-19 fallout. By this, we can expect some improvement in the situation that shall help the economy to revive back once again. According to the European Winter 2021 Economic Forecast, the real Gross Domestic Product (GDP) is now expected to reach pre-crisis levels by mid-2022. However, the only obstruction to the growth would be the ongoing pandemic and the speed of vaccine rollout. The latter being the most important one as the vaccination process and the vaccine’s efficacy shall decide the course of further mutations of the virus and government’s decisions on how to handle the health risks.

The repercussions of the same shall also be seen in the European markets and the currency which traded on a roller coaster mode since the start of 2020. The onset of Covid-19 had pushed the Euro currency to the lowest level of 1.0690 in April 2020. Thereafter, the shared currency recovered sharply on back of various measures adopted by the EU that helped the Euro-zone economy. However, once again the currency is moving towards the southern direction on fears surrounding the Delta virus. There is a possibility that both EURUSD and EURINR shall trade with a negative bias towards 1.1650 and 86.50 levels in the near term.

To conclude, the after effects of second wave and the possible occurrence of Delta virus could create obstacle to the growth path of Euro-zone. Considering the recovery packages undertaken, even if the outlook for the EU improves, the return to the pre-crisis level of the economic activity would still mean slow growth for the EU economy. This bearish trend in the economy shall also influence the trend of Euro currency keeping it downwards for some more time.


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