The aftermath of the credit crisis of 2007-2009 has placed an enormous strain on the governments of the world. Not least has been the pressure faced by the nations of the European Union or EU. The EU has had to rescue a number of member states that have been close to bankruptcy. These near disasters have had quite an impact on the value of the Euro against other major currencies.
The EU elected to take the route of opting for a regional currency some time ago. Some EU nations – most notably the UK – have opted out of the Euro. Those that braved the challenge and adapted the Euro as their national currency are collectively known as the Euro zone.
The single regional currency strategy has worked for the Euro zone countries for some time. Advocates of a single global currency have long pointed to the Euro as a shining example of how a global currency could work. But circumstances have changed. As long as the economies of all of the EU nations (or more specifically the Euro zone nations) remained fairly strong, the Euro performed well.
Having spent billions and possibly trillions of Euros to bail out the failing banks that started the crisis, many of the Euro Zone economies have placed their budget deficits at record levels. The high levels of budget deficit were accompanied by recession. By saving the banks, many governments placed their entire people at risk.
The financial crisis precipitated not only a massive recession but a debt crisis as governments struggled to cope with unprecedented levels of debt. These levels of debt have exceeded even the national debt incurred as a result of war. Massive government debt coupled with a deep recession and falling tax revenues left many countries facing national bankruptcy.
Greece found itself under huge pressure. Unable to meet its huge debt commitments, the Greek government turned to the EU for help. A rescue package was provided. The rescue package was given at great cost to the Greek people. During the crisis, the Euro fell against the dollar. Once the package was in place and the world had a chance to forget, the Euro once again regained much of its strength. It seems that the Euro exchange rate was affected but managed to regain its strength quickly.
Next to face crisis was the recently thriving Republic of Ireland. Again, the Euro came under pressure. Again it recovered. This time the recovery was a little more fragile.
The question now is who is next. Spain is expected to face the music sooner rather than later. The Euro will again come under fire.
The Euro has become the world’s second most important currency after the US dollar. The US dollar does respond to economic crises at home. Every currency does. A fall in the share prices will impact the level of the dollar as does a high government record deficit. The dollar has shown remarkable resilience over the longer period. Setbacks have been quickly followed by recoveries. Most falls in the value of the currency have not been sustained.
The Euro has also shown remarkable resilience. The crisis in Greece followed by the Irish crisis did raise questions about the Euro. Although the currency did fall, the fall was less than anticipated and was not sustained. The effect was much less than it could have been for a stand-alone currency. While Greece and Ireland faltered, the strength of the community as a whole played a major part in minimising the impact of crisis in one or two Euro Zone nations.
The value of any currency is determined by the market’s interpretation of the strength of the underlying economy. It is based on the perception of the economy of the region as a whole. The strength of the US dollar is based on the market’s overall perception of the US economy. A financial crisis in Texas would not substantially reduce the value of the dollar. Similarly, the overall strength of the Euro Zone economies has ensured that the Euro continues to be perceived as a major currency.
Nevertheless, the Euro has suffered as a result of the crises. As a result, its value has lower than a weak US dollar.
The fact that the Euro reflects the overall strength of the Euro Zone nations has a paradoxical effect. The Euro is currently under par against the US dollar. The European Central Bank does not have the option to devalue the currency. But when one of the member states falls into financial crisis, the Euro is effectively devalued. This brings certain benefits to Euro Zone members whose exports to non Euro Zone countries become more competitive while imports cost more.
The Euro has shown itself time and again to be resilient, able to withstand crises in member nations. Perhaps a single global currency could promote a stable world economy after all.
The aftermath of the credit crisis of 2007-2009 has placed an enormous strain on the governments of the world. Not least has been the pressure faced by the nations of the European Union or EU. Most of these nations chose to opt for a single regional currency some time ago.
A single regional currency was a strategy that worked for the EU for quite a while. The advocates of a single global currency pointed to the Euro as an example of how a global currency could work. But that was under slightly different circumstances. As long as the economies of all of the EU nations remained fairly strong, the Euro performed well.
Having spent billions and possibly trillions of Euros to bail out the failing banks that were behind the crisis, many of the EU countries have placed their budget deficits at record levels. The high levels of budget deficit were accompanied by recession. By saving the banks, many governments placed their entire people at risk.
Greece found itself under huge pressure. Unable to meet its debt commitments, the Greek government turned to the EU for help. A rescue package was provided. The rescue package was given at great cost to the Greek people. During the crisis, the Euro fell against the dollar. Once the package was in place and the world had a chance to forget, the Euro once again regained its strength. It seems that the Euro exchange rate was affected but managed to regain its strength quickly.
Next to face crisis was the recently thriving Republic of Ireland. Again, the Euro came under pressure. Again it recovered. This time the recovery was a little more fragile.
The question now is more one of who is next. Spain is expected to face the music sooner rather than later. The Euro will again come under fire.
The Euro has become the world’s second most important currency after the US dollar. The US dollar does respond to economic crises at home. Every currency does. A fall in the share prices will impact the level of the dollar as does a high government record deficit. The dollar has shown remarkable resilience over the longer period. Setbacks have been quickly followed by recoveries. Most falls in the value of the currency have not been sustained.
The Euro has also shown remarkable resilience. The crisis in Greece followed by the Irish crisis did raise questions about the Euro. Although the currency did fall, the fall was less than anticipated and was not sustained. The effect was much less than it could have been for a stand-alone currency. While Greece and Ireland faltered, the strength of the community as a whole played a major part in minimising the impact of crisis in one or two EU nations.
The Euro has shown itself time and again to be able to withstand crises in member nations. Perhaps a single global currency could promote a stable world economy after all.