On the 1st of January 1999, the world was introduced to the Euro currency. Perhaps the most ambitious project in fiscal history, it replaced the currencies of the majority of EU member states at a stroke, ending the era of national currencies like the Deutschmark and the French Franc. The single currency, as it is often termed, has had an interesting ride over the last quarter of a century. It has largely been deemed a success, even if its existence has been continually questioned. Indeed, despite being one of the world’s major currencies, we still see naysayers predicting its demise today.
Of course, in some measurements, the Euro has been an unqualified success. The EUR/USD forex trading pair is the world’s most liquid currency pair, and the Euro itself is reported as being part of almost 40% of daily trading volume. If you were wondering what is forex trading and how does it work? The key thing to note is that it is the daily movements of global currencies against each other. The Euro is the second “biggest” currency behind the US dollar. In practice, that means we are talking about trillions worth of Euros being traded in forex markets each day.
As for its failures, it is largely wrapped up in the Euro as a ‘political’ project, and that does not sit well with all EU Member States, nor many of its citizens. Indeed, while the majority of EU countries adopted the Euro, more than a quarter did not: 20 of the Member States have the Euro as official currency, with seven (plus the UK, which recently exited the EU) keeping hold of their own currencies.
The Euro has been in decline for years
For forex traders, one of the most interesting aspects has been the Euro’s decline in recent years. As mentioned above, it is a key player within the forex markets, but its value has declined steadily over the last fifteen years or so. Consider that €1 bought $1.60 around the time of the Great Financial Crisis of 2008; the two currencies reached parity in 2022. And while a Euro buys more than a dollar at the time of writing, the overall trajectory has been downward.
Unfortunately, many analysts charting the Euro’s decline talk of its parallels with the wider decline of the EU economy. Again, looking back at 2008, The EU’s economy was bigger than that of the United States, $16.2 trillion vs. $14.7 trillion. By 2022, the US economy had exceeded $25 trillion, whereas the EU had barely seen any overall growth. We must add two caveats. The first is that the world’s sixth-largest economy (the UK) left the EU in 2020, and overall growth would have been higher compared to 2008 had the UK been counted in the measurements.
Europe remains an economic powerhouse
The second caveat is that despite the decline, the EU remains an economic powerhouse, representing around a sixth of the entire global economy while only having about 5% of the world’s population. Yes, it may rely too much on the United States’ technology sector, and it is beholden to Russia for much of its energy needs and China for its manufacturing. Yet, it is also home to the huge financial centres of London, Paris, and Frankfurt, exports from the engine room – Germany – and it is the global leader in international tourism. Still, many investors see Europe as cumbersome and weighed down by red tape. They prefer to look to the Americas or to the east and South Asia.
Regulation is a huge deal-breaker for European investment, and it’s a constant bugbear for those who wish to do business there. Consider the rush for the European Commission to dish out regulations for the explosion in artificial intelligence applications. Yes, the EU will see it as a means to protect its citizens, notably their privacy. But it has turned off the taps of innovation within the Member States. Nobody is betting on Europe to win the AI race, and that means they will lag behind in a new economy that could dwarf that created by the worldwide web.
As for the single currency, as mentioned, there are many predicting that the end is nigh. We should, however, stress again that the tying up of the Euro as a political project, one that was meant to foster “ever closer union” between the Member States, tends to colour such reporting. Indeed, some believe there is a concerted effort to undermine the single currency’s standing. As such, that can impact financial reporting on the currency’s prospects.
Conclusion: The Euro is here to stay
Indeed, while we don’t think there is an existential threat to the Euro in terms of its economics – it may decline, but it will still be held up by necessity, policy, and political will – its chief danger comes from within. If a Member State, particularly one of the big players like France, votes to leave the European Union, a so-called Frexit, then the Euro would face its toughest test. Yet, after 25 years, the currency is now engrained in the continent, both socially and economically. Even some of the most hardened anti-EU politicians now admit that the Euro is here to stay.
