Euro Performance Present - Future

How is the Euro likely to perform in the future?

1. The Euro isn't going to be going away anytime soon. Currently, it makes up 30% of the world's debt market, while the US dollar accounts for 44%. Further, it accounts for 25% of international bank liabilities. Also, many EU and non-EU countries (Kosovo, Montengro, etc.) are using the Euro as an "anchor" currency when calculating the exchange rates of other currencies. Basically, lots of people are counting (haha, it's a pun) on the Euro - it simply could not be removed as a currency at any point in the forseeable future.

2. Most modern currencies are freely convertible - that is to say, there is no restriction on the amount of international purchases or sales of that currency. This is one trait that the Euro shares - Article 56 of the Maastricht Treaty provides that there be no restriction on payments between member states, or between member and non-member states. This effectively means that no amount of political disagreement between two member countries could ever stop the flow of money from one country to another. If this ever becomes an issue in the future, the Euro will not be affected - adding to the Euro's long-term survivability.

3. Currently, the EU is experiencing steady long-term growth. While the economy has suffered in recent years for reasons mentioned in previous posts, an overall view indicates that as the European financial and capital markets become more integrated, the Euro will become even more attractive to borrowers and investors. As previously mentioned, financial instruments that trade frequently tend to be overvalued - a higher level of interest indicates that the Euro would be more frequently traded and used, possibly raising its value relative to other currencies.

4. The stated current and future objective of the European Central Bank is to maintain price stability. As stated by the ECB, "Price stability is a prerequisite for sustainable growth, investment, and employment. It anchors expectations, reduces financing costs, and facilitates an efficient allocation of resources."

But there are many people who are not so confident about the Euro's future - in fact, the majority of people feel this way.

1. The fact that the French and Dutch rejected the new EU constitution indicates that there is an uneasiness amongst the member states. Since the Euro derives some of its value from the confidence that the world has in the stability of the EU, these actions called the current value of the Euro into question. In the days following these referendums, the EU was significantly devalued. This demonstrates that political disagreements are set on the world stage, and that anything that enters the public eye can possibly damage the EU's reputation and the value of their currency.

2. In Fratianni's paper, "Dominant Currencies and the Future of the Euro", he states that, "The transaction domain of an international currency depends on its ability to lower transaction costs relative to alternative currencies." His argument is that the EMU financial markets are not as integrated (and therefore not as liquid) as the US financial markets, thus favoring the use of the dollar as a median of exchange. He gives words to concepts that I've been searching to explain, indicating that "inertial" and "reputational" considerations also favor the dollar - the US economy is still the most respected economy in the world and has favorable short- and long- term growth. His final point is that the ECB needs to carefully follow the fundamentals laid out in the Maastricht Treaty if they hope to appreciate the value of the Euro.

3. In Arestis' paper, "The Future of the Euro: Is There an Alernative to the SGP?", the authors call into question the necessity of the Stability and Growth Pact, the document that lays out the long-term economic goals of the EU. They critique the shortcomings of a few of the imposed restrictions of the SGP: mandatory fiscal austerity, separation of fiscal and monetary policy decisions, undemocratic structure, the lack of accountability of the ECB, etc. The most important point they bring up is to criticize the ECB's single-minded focus on price stability - aren't they neglecting other (and possibly more easily attainable) policy objectives, like employment?

4. Arestis has another paper entitled, "Will the Euro bring Economic Crisis to Europe?" In this paper, he suggests that the Euro as launched at the wrong time, when unemployment was at a remarkably high 10%, and disparities between the wealthy and the working poor were relatively severe. This abnormally high level of unemployment is unlikely to continue, but the current ECB policy remaining standard, the Euro will have what Arestis calls a "deflationary bias". Arestis points out some other reasons for instability, most notably the competition that is likely to ensue between the USD and the Euro. He argues that the ECB has inadequate power and focus to deal with this problem.

5. I have attempted to access Hartmann's paper, "The Future of the Euro as an International Currency..." but the authors seem to be quite possessive of it, and demand that I pay for it. I can't really afford to do that, so I just read the abstract. Hartmann seems to agree with Arestis for the most part, with the additional stipulation that the current planned expansion of the EU may outpace the integration capabilities of the Euro. He indicates that the EU should take their time and achieve current stability before adding more member nations to their list and further extending the Euro's responsibilities.

The Euro has things working both for and against it. It amazes me that there are so many factors that influence the occurence of any one event. There are a billion conceivable ways that the value of the Euro could be changed. Like the butterfly effect, my purchase at the supermarket today will influence the future value of the Euro. With that in mind, I'll make sure to use my Kroger Plus card.