Thursday, April 3, 2014

The Euro --- A Most Successful Currency!

When the Euro was introduced, it started with an exchange rate of 1,17 USD/EUR. The Euro initially lost value against the US dollar, hitting a low of 0,82 USD/EUR within two years. Soon thereafter, the Euro recovered, returning to and exceeding the initial value of 1,17 USD/EUR and never falling below it again. It peaked in 2008 at 1,60 USD/EUR. Nowadays, the Euro is trading close to 1,40 USD/EUR.

An American who converted all his dollar savings into Euros when the Euro was introduced would today be substantially better off than he is with his dollars: the currency appreciation on one hand and higher interest rates on the other.

Wikipedia states that 332 million Europeans use the Euro and another 210 million worldwide use currencies pegged to the Euro. The Euro is the world's second largest reserve currency.

So what's wrong with the Euro? Nothing really, as long as one believes that the primary purpose of the Euro was to be a strong international reserve currency.

However, take Greece as an example. Suppose the austerity of the last 5 years have made Greece 15% 'cheaper' within the Eurozone. Relative to third currencies, that effort was wiped out by the revaluation of the Euro by about 15% in the last 2 years.

What a deal! You go through all sorts of pains to become more competitive pricewise and due to factors totally beyond your control, that pain turns out to have been for nothing. Well, not really for nothing because Greece does much of its trade within the Eurozone but the rest of the world could potentially hold very much promise for the Greek economy and that potential has been damaged by the Euro.

1 comment:

  1. This argumentation - that the Euro was a successful currency - is correct. It had from begin the construction error (known to experts) that Target2 imbalances were not required to be regularly settled.

    Otherwise the main problems started with Germany being forced by unforeseen circumstances (reunification with eastern part) to temporarily violate the Maastricht contract. Germany imho has taken the necessary corrective steps, while other countries like Italy and France did not. This might pretty soon result in a new crisis of the Euro.

    Looking back I am convinced that for Greece and EU it would have been better that Greece left the Euro or even better had not joined it earlier.