The Euro has been all over the news lately. As someone hoping to go abroad junior year, I’ve been paying close attention to it—the exchange rate will determine a lot of what I get to do if I’m able to go. So far in 2015, if current trends persist, I would be lucky next year. The USD/EUR exchange rate has gotten steadily better for the U.S.—as in, the values of the Euro and the US dollar have been getting closer and closer every day.
It seems there’s no reason to be certain of anything to do with the Euro these days. While the economy appears to be on the mend in the U.S. (the Federal Reserve Board is finally phasing out of emergency recovery tactics taken in the wake of the 2008 financial crisis and unemployment is at its lowest since the crisis!), the same is not true in Europe. While this may be driving the exchange rate lower, it’s not always clear if will hold for the long run.
To try and help you understand the euro issues better, I’ve made a list of three things to watch in 2015 (just in case you’re planning a trip to Europe or maybe you just want to understand what your Econ Major friends are talking about).
1. The European Central Bank — printing more euros???
This is the main explanation for the Euro’s fast decline over the past few weeks. In an effort to stimulate the economy across the board, the European Central Bank (ECB) has been printing more Euros, much like the Federal Reserve Board did in the wake of the 2008 crisis. It’s not a long term solution. Not to mention, the key to the U.S. recovery was the simultaneous decision to buy up debt in the form of bonds.
Europe is considering this course of action as well, but they face a challenge that the U.S. did not. They have to decide if they will use the bonds to buy German debt, Greek debt, Spanish debt, or Italian debt, and so-on. Some of these are stable (cough*Germany*cough) and some are much riskier (cough*Greece*cough). Still, there’s more to gain by buying up Greek debt as opposed to German debt, though the ECB can’t really afford to leave Germany out. It is, after all, the market that saved Europe in the immediate aftermath of the crisis.
The problem for Europe is that in order to bail out countries like Greece, Spain, and Italy, they need to have an ambitious plan for depreciating the euro. In contrast, Germany doesn’t want or need this depreciation. The balance between making Germany happy (so that it doesn’t leave the Union) and keeping other countries afloat is what makes this a difficult problem for the ECB.
So what are they going to do? Thursday, the ECB announced they were going to print 60 billion euros and use that to buy up debt throughout the EU. The road from there is less than clear.
2. The Swiss Bank — printing less francs???
When the euro started falling, the Swiss realized they had a problem. In 2011, when the European Union hit the lowest point of its recession, the Swiss made what may seem like a strange decision. They promised Europe that the exchange rate between the Euro and the Swiss Franc would be maintained at 1.2 Francs/Euro, no higher. So for the last couple of years, the Swiss Central Bank has been printing more francs and buying up euros.
When the ECB made the decision to print more euros, the Swiss realized that in order to keep their cap in place, they too would have print more francs and buy more steadily depreciating euros. They decided Monday that this was no longer a sustainable option for them. So they got rid of the cap and watched the value of the Franc soar.
This seems like it should be a good thing (well, not if you’re planning on travelling to Switzerland anytime soon). But it’s actually been rather harmful in the immediate aftermath to Swiss banks. The Swiss economy is export-driven and the logic behind the initial cap was to protect these exports. When the Swiss franc soars, the prices of Swiss goods soar in other European markets. Ergo, less people buy Swiss goods and then the Swiss economy suffers.
3. The Greeks — goodbye to austerity, goodbye to the euro?
Somehow, whenever there is an economic problem, Greece seems to be in the center of it. A few years ago, the fall of the Greek economy predicted the recession that hit the rest of the Union much later. Now, several years into the austerity measures enforced by Germany, Greece has decided it has had enough.
On January 25, Greece will hold its elections and the Greeks are expected to put a party in power that has promised to reduce austerity measures. Austerity is the plan Germany enforced in European countries it bailed out of the economic crisis—it involves higher taxes, lower spending and is essentially just painful. The Greeks are done with it and if the election goes as expected, they will get their way.
Germany isn’t quite behind this issue and if they give into Greek demands, they risk further demands from other countries under austerity (Ireland, Poland, Cyprus, to name a few). Expected new Greek leaders have already expressed their willingness to leave the EU. This, of course, poses the risk of the same countries that would want austerity concessions to make the same risky move.
So what does all this mean for my possible travel plans? It means that even though the Euro is likely to continue to fall in value, we still need to watch closely. There’s something amiss in the European Union and it seems, for the moment, as if some sort of economic clash/crash is inevitable.