After 2019 saw the gold price rise across Europe, the coronavirus has plunged the Eurozone into a fresh crisis that has seen increasing numbers of investors turn to gold bullion to protect their wealth.
A European Central Bank update on May 14th stated, 'The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime.'
The European Union’s statistical agency, Eurostat, reported the sharpest actual decline in eurozone activity since the monetary union was launched more than two decades ago. Q1 2020 saw Eurozone GDP shrink by 3.8%, putting the economic powerhouse on track for a recession in 2020. Christine Lagarde, Head of the European Central Bank, further warned that the eurozone could be on course for a 15% collapse in output in Q2, as lockdown restrictions remain in place across the continent.
At the end of 2019 China had reported a cluster of cases of ‘pneumonia’ in Wuhan, Hubei Province. Few would have predicted the cataclysmic impact it would have on Europe and the world at large.
The year began with the Euro falling to a low of 95.94 in February, as shown by the Euro Currency Index (EUR_I). It measures the Euro against the US-Dollar, British Pound, Japanese Yen and Swiss Franc. In the current global pandemic, all other currencies are suffering, and this has seen the Euro rise to 100.75. This has not stopped gold from rising to an all-time high of 1 633.46€ last week however as investor clamour for bullion while other assets like stocks drop.
Germany has the largest national economy in the Union, and the fourth largest in the world. Last year it had already suffered its lowest growth in GDP since 2013, rising by just 0.6%.
German Federal Statistical Office figures for the first quarter of this year show GDP down by 2.2%. This is, however, far less than other large eurozone economies. Spain, Italy and France, have been hardest hit by coronavirus lockdowns, and are all expected to see their economies enter significant recession this year.
Peter Altmaier, the German minister for the economy, expects the eventual 2020 German GDP to decrease by 6.3%. This would be the worst national recession since the current post-war German State was founded in 1949.
From its establishment as a nation state, through two world wars, Germany has many times experienced currency devastation. Generations of Germans have therefore invested in gold to protect their wealth. It is a mindset that continues today and shows little sign of changing in the current crisis. It makes Germany, per capita, one of the world's largest consumers of the precious metal.
France and Italy, the second and third biggest economies in the monetary union area, are already in recession.
Before the current crisis Italy's economy was already teetering on the edge of collapse. Sadly, it has also been one of the eurozone nations worst hit by the coronavirus pandemic. Its death toll stands at over 32,330 according to its Civil Protection Agency.
Now, after eight weeks of shutdown, the European Commission expects the Italian economy to shrink by nearly 10%.
Unlike in Germany, Italy's rising unemployment sees many investors forced to sell their gold. Massimiliano Barrotta, the manager of three “Compro Oro” (I buy gold) shops, told Reuters, “We have seen an increase of about 50% in our purchases of gold from private customers this year, particularly in the last two weeks.”
Spain has seen similar tragedy to Italy in the number of deaths as a result of Covid-19, and long-lasting lockdown saw its economy shrink by 5.2% in Q1 2020. The real fear for much of Europe is that these figures include only the beginning of Europe’s lockdown response, and they will worsen in Q2 when the impact of the virus is truly accounted for.
The big divide
The clear contrast between Italy and Germany illustrates why the European Union and the European Investment Bank has struggled to establish a unified response to this global catastrophe.
There has been an ongoing divide between Northern states, like Germany and the Netherlands, and the south, represented by Spain and Italy. There has been caution and restraint from the North. In stark contrast, the South has called for large scale unrestrained economic support whatever the cost.
Finally, the European Commission, the EU executive, has a plan. It proposes to borrow 500 billion euros ($550 billion) as common debt and transfer it to the hardest hit regions and industries.
With the global economy mirroring that of the EU, a global recession is now a case of how bad, rather than if. Gold prices have been climbing steadily since March, and many analysts are forecasting further gains to come. During the 2008 financial crisis it took 3 years for gold to reach its previous all-time record in Dollars, so the recent gains could be the start of a bull run for gold not seen in a decade.