For a few weeks now, the fear-ridden word “euro crisis” has been back in the political vocabulary. High inflation and the resulting need for rising interest rates are fueling concerns that some countries in the monetary union will soon no longer be able to pay their debts.
On Tuesday, concerns about the common currency received new fodder: After the euro had been significantly stronger than the US dollar for around two decades, the common currency was briefly worth exactly one dollar again at midday. It fell to parity for the first time since 2002 – an exchange ratio of one to one.
The prominent brand fits into the picture of a weakening euro. A year ago you got 1.18 dollars for one euro, but the European currency has gone downhill – especially since Russia’s attack on Ukraine. However, the downward trend had already started at the end of 2020.
The euro peaked during the 2008 financial crisis when it was worth $1.6038 in July. The euro was first introduced as book money in 1999 – the exchange rate against the dollar on January 4, 1999 was 1.18 dollars. In January 2000, the euro fell below par with the dollar, and the record low was reached in October 2002 at $0.8230.
The effects of the war in Ukraine on the euro area are significantly greater than those on the USA. Dependence on Russian gas, tightly linked supply chains with Ukraine and the physical proximity of the war make a recession in Europe more likely.
If the gas supplies from Russia fail completely, the continent is threatened with a serious economic crisis and rapidly increasing unemployment. “Because of the serious reasons for the recession, fear has taken over,” said the chief economist at Hauck Aufhäuser Lampe Privatbank, Alexander Krüger. The ZEW economic barometer, which measures the mood on the stock exchanges in Germany every month, fell significantly on Tuesday.
The hesitant interest rate policy of the European Central Bank (ECB) is also contributing to the weakening of the euro. The currency remains weak because it is scarcely able to tackle inflation with higher interest rates due to concerns about the solvency of the highly indebted euro countries.
The key interest rate is not expected to rise until July – but only to 0.25 percent. In the USA, on the other hand, the Fed has raised the key interest rate to between 1.5 and 1.75 percent.
Since the central banks are sticking to their previous lines and the consequences of the war will continue to be felt, especially in Europe, the trend is likely to continue. The currency analyst at Citigroup, Ebrahim Rahbari, also assumes that the euro will continue to fall even after falling below parity with the dollar: “The dollar is still king.”
A look at the companies also fuels concerns about further economic difficulties. According to a survey by the German Economic Institute (IW), a quarter of companies expect production to fall.
The development of the euro could fuel inflation even further. When other currencies become stronger, goods imported into Germany become more expensive. When the euro exchange rate falls, consumers have to dig even deeper into their pockets to cover their living expenses. Above all, the already high energy and raw material prices threaten to rise further. Because it is customary internationally to pay in US dollars.
In principle, however, a weak euro has advantages for German industry in particular. Because the German economic model has been based on exports for years. And what is negative for import and price development is positive for export:
Goods from the euro zone are becoming cheaper abroad and are therefore in greater demand. In view of the fact that Germany recently reported a trade deficit for the first time in years, the euro exchange rate could well come in handy for some exporters.
However, the disadvantages of inflation currently outweigh the advantages of better export opportunities. “All in all, the devaluation of the euro currently poses more risks than opportunities for the euro zone,” argues Sonja Marten, an analyst at DZ Bank.
“The extreme price hikes in import and producer prices overshadow any gain that exporters can take from a weaker currency.”
From 2023, Croatia will also be part of the euro zone. The European authorities and the federal government gave their approval for this this week. EU Commission President Ursula von der Leyen sold it as strengthening the monetary union.
According to the CDU politician, the euro will be strengthened with the accession of the Balkan country. However, some economists see it differently. Stefan Kooths, Vice President of the Kiel Institute for the World Economy (IfW), fears that Croatia only hopes to benefit from the more favorable debt conditions in the currency union.
“It’s worrying that the strong countries like Sweden or Denmark don’t want the euro,” Kooths told the “Welt”. “When in doubt, only the stock of plasticizers will grow in the future,” he continued.
Last month, the ECB made it clear that it wanted to avoid excessive interest rate hikes for economically weak countries. As long as the major problems of the monetary union have not been solved, the circle should not be expanded, said Kooths.
According to the EU, Croatia fulfills the conditions for joining the euro. They include price stability, exchange rate stability, durability compliance with the ECB’s fiscal policy objectives and sound public finances. However, Croatia is the third poorest country in the EU with a gross domestic product per capita of just under 15,000 euros.