The European economy has been hit by a serious problem. The Euro has jumped 12 percent in five months, rising above $ 1.2 on September 1 for the first time since may 2018. The European Central Bank (ECB) sees the strengthening of the currency as a new problem, writes Bloomberg.

The Eurozone is highly dependent on exports. With the strengthening of the national currency, local products lose their competitiveness in foreign markets, goods become more expensive, and because of this, demand for them may fall. “1.2 dollars per Euro is something like a red line. At the moment, there really isn’t much the ECB can do other than try to lower the currency,” said Katarina Utermoel, senior economist at Allianz SE.

The strengthening of the Euro is an additional burden for exporters, but it is much more important that global demand is generally quite low, said Olaf Wortmann, economist at the German engineering Association VDMA. The gravity of the situation became clear when the latest data showed that inflation in the Euro zone turned negative for the first time in four years.

The deflation rate was 0.2 percent in August (versus 0.4 percent inflation in July). The decline in prices is due to falling consumer demand, which reduces the income of producers, forcing them to reduce production and lay off workers.

The EU economy shrank by a record 14.4 percent year-on-year in the second quarter of 2020. This was the biggest decline since statistics began (since 1995).