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FX Insights: Euro celebrates its 20th birthday

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Twenty years ago, on January 1, 1999, eleven EU countries established the euro as a common currency.

There are now 19 EU countries in the Eurozone (EZ). The size of its economy grew by 72 percent to €11.2 trillion ($12.8 trillion) as of 2017, second only to the US and just ahead of China (which may overtake it shortly). The euro is used by 340 million Europeans; 60 other countries have currencies linked to the euro.1


Has it been successful?


Top European leaders think so. ECB President Mario Draghi stated, “after 20 years, there is now a generation who knows no other domestic currency." And European Commission President Juncker avowed “the euro has become a symbol of unity, sovereignty and stability. It has delivered prosperity and protection to our citizens.”2

EU finance and trade officials think so. Surveys indicate that the euro has contributed to stable prices, lower transaction costs and increased trade throughout the Eurozone and beyond.3

Citizens within the Eurozone think so. When asked if the euro had been good or bad for their country, 64 percent of member state citizens said it has been good, up from 51 percent in 2002, according to Eurobarometer’s annual pan-European poll.4


Has the euro been overly volatile?


The euro was launched at $1.1743 against the dollar. It dropped to a low of $0.8287 in 2000, then climbed steadily, peaking at $1.5938 in 2008. This range of 44 percent is well in line with the ranges of GBP/USD, USD/JPY, and USD/CAD over the same time period, so it has not been overly volatile. Currently, the euro trades near $1.1360, only 3.2 percent away from its launch rate 20 years ago.5 I consider that quite an achievement.


Which countries benefited the most/least?


The big winner was Germany. Germany had to give up its beloved deutsche mark, but for the EZ’s biggest exporter, the euro has been a boon, allowing its products to be priced in a cheaper currency. And, with fixed income rates lower in Germany, German companies have been able to borrow more cheaply.

A so-so winner was Ireland. Irish borrowers gained from lower interest rates set by the ECB, and while that fueled a real estate bubble that went bust, the euro has enabled Ireland to be highly competitive within the EZ, attracting a more productive labor force, while keeping labor costs under control.

Losers. Before the birth of the euro, France, Italy and Spain were able to respond to economic crises by lowering the value of their currencies, and the euro took that privilege away. Reluctant to give up their economic identities, France, Italy and Spain have had trouble integrating into the EZ, and their economic growth has suffered.


Big hurdles going forward: anti-globalization, populism and nationalism
  • Optimists say that the near-death experience of the euro in recent years will spur the kind of integration necessary to stabilize the euro-zone for the long term.6
  • Pessimists say the gulf between the economic performances of the strong economies such as Germany and the Netherlands and the weak economies of Greece and Italy is destined to lead to an existential crisis in the euro.7
  • Indeed, over the last year, we have seen social unrest, political upheaval and unpredictable change in Europe, which is certainly precarious for the future of the euro, as well as the EU.
  • The impact of the EU Parliamentary elections in May could offer clues to the euro's future. We'll be watching.

Sources:

1, 2, 3, 4 Europa.eu

5 Bloomberg

6,7 The Independent, UK

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About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.

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