A weak Euro is not something that can be sustained for long. Measures must be adopted.
Europe has long been battling with a number of problems. The debt crisis, especially in Greece, national bailouts, political uncertainty, growing popularity of Eurosceptics, Brexit, asylum seekers’ crisis, and much more; This has led to a situation where Europe as well as the Euro are on the brink of survival.
The current level of investment is unsustainable without more consumer spending. Even with the ECB’s prediction of a minimal, if not moderate consumer price growth (accelerating by about 1.6 percent in 2018), there are other problems in the EU as well as uncertainty. This has damaged investors’ confidence, and this certainly has not been a great help in the recovering of the Euro.
A loose monetary policy is also to blame, along with the circumstances. The dumping of huge quantities of Euros onto the markets by the European Central Bank in order to overcome the gap was another contributor. The result was a decline in the value of the Euro from above 1.50 per USD in 2008 to the current 1.06 per USD. The foreign exchange markets have also not been very generous. In contrast to the USD, which is under the influence of the equity values, the Euro mostly depends on economic growth prospects and the ECB measures. Even in high uncertainty, investors prefer dollar-denominated assets than Euro-denominated ones. This the reason that the ECB officials intend to continue with the monetary stimulus in order to sustain the recovery of the EU, and President Mario Draghi made it clear that they would continue with the government-bond purchases until the end of 2017.
The solution would be a reduction of ECB’s stimulus that would lead to a stronger Euro. A good example is the Deutsche Bank crisis; it did not weaken the Euro, as was expected, but strengthened it, because of several reasons. The ECB couldn’t expand the stimulus and lower interest rates, which would lower the Euro’s value. Low interest rates mean lower revenues for the banks and in the situation in which they are, they don’t need to be more vulnerable. The second reason is the rapid sale of risky assets, which was mostly denominated in Euro, that affected the Euro’s value because of higher demand. With this, there is a chance of an overall increase in value by the end of 2017.
Recent years have thought us that even if the Euro recovers in the short-term, this doesn’t mean anything if it cannot reach stability in the long-term. The region’s current account surplus could be an essential catalyst for the longer run stability of the Euro. A positive growth signal and a less weak total yield are definitely good signs that the Euro can be recovered. One of the solutions is credit easing, which can be effective in boosting the EU economy. Draghi’s suggestion that the ECB will end with pushing negative rates as a policy tool certainly is a good sign. If the central bank raises interest rates, this would cause a rise of the currency. An answer to the situation would also be selective fiscal expansion. If the core regions practice fiscal expansion, there may be monetary spill-overs, and this may have a positive effect of the rest of the regions (periphery). That said, there is a probability that the GDP of the EU also is influenced with the measures. This could automatically provide a boost to the EU and the Euro.
It would take time to see the effects of these measures, certainly. And, when the measures taken are good, and it is towards systemic improvement, it may be worth the wait.