How does the European crisis affect the crypto market?

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How does the European crisis affect the crypto market?

Not long after the intense impact of the COVID-19 pandemic on the economy, it seems that Europe is headed for another economic crisis. Inflation is growing, an energy crisis is threatening, and in some member countries, debts are increasing.

The situation is starting to take its toll on the dominance of the euro, and if the crisis worsens further, it may affect both the stock and crypto markets.

What is the European crisis anyway?

Europe is currently facing several macroeconomic crises, which is clearly visible in the recent decline in the euro's dominance against the US dollar.

While Europe managed to ease the way out of the pandemic crisis, it encountered new problems - the conflict between Russia and Ukraine, with the European Union, Great Britain, and the United States announcing harsh sanctions against Russia.

It should be kept in mind that Russia is the largest supplier of gas in Europe (about 43.4% in 2020). Due to the sanctions, however, the EU was forced to reduce oil imports from Russia, which consequently increased gas prices amid high energy demand.

As a result, some businesses are closing their doors due to high energy costs, and there are fears that the economy will be significantly affected if more businesses close due to losses caused by high energy costs, writes Cryptopolitan.

In the midst of the European energy crisis, the main issue is inflation. The inflation rate in the Eurozone in July this year was 9.8%, which represents the highest increase in the last 25 years. Some of the most affected countries are Estonia (23%), Latvia (21.3%), and Lithuania (20.9%).

The statistical agency of the European Union, Eurostat, pointed out that the rising costs of energy and food are the main drivers of inflation in the EU. In addition to the coming crisis, some of the European countries that are net importers, especially the PIGS group of countries (Portugal, Italy, Greece, and Spain), are drowning in debt and risking bankruptcy.

Previously, the European Central Bank (ECB) would have stood up for these countries and bought their debts because the EU is a net exporter, which is the saving grace for the dominance of the euro. However, some major EU exporting countries, such as Germany, have also turned into net importers, which affects demand for the euro and explains the currency's recent decline in dominance against the US dollar.

If the ECB no longer intervenes, some nations may decide to secede in order to create and print their own currency and thus avoid inflation. “[…] If they raise rates and they stop the purchasing of debt from southern countries, which would protect the value of the euro.

By doing that, you raise rates, you stop printing money. Then you run into a scenario where no one’s buying PIGS’ nations’ debt. And at that point, they default on their debts, and if PIGS nations default on their debt — again, this is Portugal, Italy, Greece, and Spain — you’re running into a problem where they need to renominate in their own currency so that they can actually print their way and inflate their way out of it,” Crypto expert, Brandon Green explained in a recent podcast.

How the European crisis affects the crypto market

Europe is the main pillar of the global economy. If the European Union's economy deteriorates amid rising inflation, rising debt, and energy costs, the effect would certainly be felt in several sectors of the global economy, including the stock and crypto markets.

Falling demand from European regions will threaten global trade. Escalation of the crisis in Europe could prolong the decline of the euro's dominance, which is good for the US dollar. However, the rise of the dollar is generally not good for stocks and cryptocurrency markets.

In a recent tweet, former hedge fund manager Raoul Pal said the US dollar could “really break things” if it continues on a parabolic trajectory.