Dusseldorf When the euro was introduced, the mothers and fathers of the euro always had the ulterior motive not only to promote the integration of Europe through the common currency, but also to create a counterweight to the world currency, the US dollar.
The first President of the European Central Bank (ECB), Wim Duisenberg, was certain that the euro would become “just as important” as the dollar over time. “The euro will develop into an important world currency,” said the head of the central bank confidently in an interview with “Spiegel” at the time, even if this could take “a decade or more”.
The advantages of a common currency are obvious. Companies in the euro area no longer need to hedge against exchange rate fluctuations, which saves on transaction costs. In addition, debtors can finance themselves more easily in a larger and more liquid financial market.
Only thanks to the great demand for dollars can the USA easily finance its high trade and budget deficits, i.e. buy goods from all over the world with self-printed money.
Most recently, in spring 2021, the EU Commission advocated making the euro a world currency. ECB boss Christine Lagarde also agreed to these efforts at the time. And the then Chancellor Angela Merkel noted with regret that the role of the euro had “not increased” in recent years and demanded: “We must do everything to position the euro as an important world currency without overdoing it .”
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US dollar dominates global financial system
Unfortunately with extremely limited success, as you can see! Today the US dollar dominates the global financial system like never before. The US currency is involved in almost nine out of ten currency transactions, and around 60 percent of global central bank reserves are held in dollars. In addition, the monetary policy of the US Federal Reserve sets the pace for stock exchanges and interest rates around the world.
Real competition is not in sight. China’s economy and thus its currency are struggling with the economic consequences of the pandemic and the fatal isolationist policy.
Japan’s economy and thus currency have been bobbing along since the real estate crash in the early 1990s, and the yen has recently had to accept drastic losses in value, as has the once proud British pound.
And the euro? After a bumpy start in 1999, confidence in the common currency grew rapidly, with the euro doubling to the dollar in seven years, to $1.60. That was in the summer of 2008, when the US financial crisis was gathering momentum.
Euro has not recovered
The strong common currency made the Europeans richer compared to the rest of the world and, with the import prices, finally pushed down the previously imported inflation to such an extent that fears of deflation arose in the Eurotower in Frankfurt.
Although the ECB is not officially pursuing an exchange rate target, it deliberately put the euro exchange rate under pressure by announcing its intention to buy government bonds.
(Photo: dpa)
Although the ECB is not officially pursuing an exchange rate target, it deliberately put pressure on the euro exchange rate under its President Mario Draghi by announcing its intention to buy government bonds.
The euro never recovered from this phase of weakness; Measured against its peak, it has lost around 40 percent of its value against the dollar to date – 15 percent of it in the past twelve months alone.
It is true that the export economy of the countries of the euro community was strengthened in this way. In the meantime, however, the downsides are becoming increasingly apparent in the form of imported inflation. One might argue about whether the harm of a strong devaluation outweighs the benefit or vice versa.
>> Read here: Farewell to “Mister Euro-Rescue”
At the time of the D-Mark and the lira, it was common for a country like Italy to save its international competitiveness through devaluations. The heavily export-oriented German economy, on the other hand, was confronted with numerous revaluations, which initially made its products more expensive on the world markets, but drove the industry to continuously increase efficiency.
Devaluation of the euro has accelerated inflation
The recent depreciation of the euro has undoubtedly accelerated inflation in the euro zone. Energy and raw materials in particular are all quoted in dollars on the world markets – even if the dollar prices remain constant, euro importers would have to pay more. With an inflation rate of just 3.3 percent, hard-currency countries like Switzerland are in a much better position today than the euro zone with 10 percent.
Definition: What is a recession?
The ECB is now trying to counteract inflation and thus also the weakness of the euro by raising the key interest rate. However, in view of the fact that the Federal Reserve is attempting to drive down the demand-driven inflation that is so pronounced in the USA with large interest rate hikes – even at the price of a recession – this undertaking is more difficult in the euro area. Because here, in addition to fears of recession, there is concern about the ability to finance some heavily indebted states.
Incidentally, global finance capital loves “safe havens”, especially in times of war, energy shortages and recession. The EU cannot overtake the USA in this respect.
>> Read here: Inflation in Germany rises to its highest level since 1951
The euro is therefore likely to lose further external value in the coming months. At best, courageous bargain hunters might toy with the idea of investing in euros, but not long-term investors. Philanthropist and speculator George Soros prophesied back in 1999: “The euro is destined to be a weak currency.”
Euro will survive crisis
Europe’s economy and the euro will certainly survive the current crisis. In order to be able to enjoy the advantages of a world currency, however, a real rethinking would be required in the large capitals of the European confederation of states.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
Europe needs a coordinated financial policy and a system to cushion economic or geopolitical shocks. The joint bonds issued as part of the Corona recovery fund should therefore not remain an exception.
For such an integration step, hitherto inviolable points of national sovereignty such as tax sovereignty and budgetary rights of parliaments must be changed.
Ultimately, a democratically legitimized European government is required – or at least a European finance ministry, as proposed by French President Emmanuel Macron and then Federal Foreign Minister Sigmar Gabriel in 2017.
>> Read here: Is the euro crisis looming after the energy crisis?
Such a government institution could, for example, have set up a common rescue package across the EU against the current explosion in energy prices.
Europe needs financial and monetary policy changes
The EU Commissioners from France and Italy, Thierry Breton and Paolo Gentiloni, therefore called for a new debt-financed EU fund to cushion the energy crisis in the “FAZ” this week.
Not entirely wrongly, other EU states see the “double boom” recently decided in Germany as illegal aid for the German economy. “The EU has shown that it can react strongly when it overcomes rifts and communitizes its financial clout at European level in a spirit of solidarity and justice,” emphasized the commissioners.
>> Read here: EU partners increase pressure on finance minister Lindner because of “double boom”.
Without deeper political integration, however, the second step would come before the first. European solidarity must be combined with a shared assumption of responsibility. Otherwise there is a risk of misguided incentives to ever more debt and ultimately the monetary community drifting apart.
However, should there be signs of a faltering or even a reversal of integration in the face of Eurosceptic governments in more and more member states, sooner or later the entire EU is likely to disintegrate along with the euro zone. In short: Without a change of course in financial and monetary policy, Europe threatens to become a geopolitical quantity negligible – i.e. negligible.
More: The weakness of the euro exacerbates the European Central Bank’s dilemma – A comment