When an extraordinary event occurs, the first thing on investors' minds is how it will affect the markets and, more importantly, how to avoid losses and profit from the situation. The widespread blackout that Spain and Portugal witnessed across the countries on Monday is one such event.
The exact cause of the power grid collapse remains unclear. Some suggest it was due to a “rare atmospheric phenomenon” over Spain. Others speculate that it was the result of a cyber-attack. And some believe it was neither. The actual cause will likely be revealed through a formal investigation.
In the meantime, economists are trying to calculate the potential damage caused by the hours-long blackouts that disrupted both power supply and Internet access. According to The Objective, losses from the blackout in Spain have already exceeded €1 billion. While painful, it is not catastrophic.
More importantly, a temporary disruption of one country's economy—even for several hours—is unlikely to trigger a crisis in the entire European Union. However, other factors could pose a greater threat to EU GDP. One such factor could be the tariff war initiated by Donald Trump in April.
The first warning signs are already appearing: preliminary PMI indices for April, published last week, indicated a worsening of business conditions in Germany and France. Adding to the concern, the Eurozone's overall business confidence index fell in April to 93.6 from 95.0 (forecasts had expected a milder decline to 94.5).
Industrial confidence also continued to fall, standing at -11.2 versus -10.7 the previous month (forecasts were for -10.1). The services sector also saw a sharper contraction to 1.4 from 2.2 (and 5.0 earlier), despite forecasts for a rebound. To make matters worse, a stronger euro could put additional pressure on the economy.
A higher EUR/USD would make European products more expensive on world markets and could reduce export sales. Large European companies that earn revenues in dollars would see their revenues eroded by converting to euros. Finally, a stronger currency also makes Europe more expensive for foreign tourists.
And now for the bad news: Deutsche Bank predicts that the EUR/USD exchange rate could reach 1.30 by the end of the decade. Still, the IMF remains cautiously optimistic. Although it recently downgraded its forecast for eurozone growth this year from 1% to 0.8%, it still expects growth to pick up to 1.2% by 2026.
