The Euro Destabilizes the Global Economy

These days, there are numerous threats to the global economy that are causing businesses and investors to fret over the prospects for economic growth in the coming years.  Top of the list is protectionism, as the rise of populist political leaders in the United States, Europe and elsewhere threatens to bring down the long-successful system of international trade and investment that has driven global economic growth since the Second World War.  Likewise, rising risk levels in China are threatening to derail growth in what has become the leading driver of growth for the global economy.  Finally, the global demographic crisis that has resulted from shrinking working-age populations in many of the world’s leading economies is a long-term threat to the well-being of the global economy. 

There is one other major risk to the global economy that has been in place for a number of years now, the European common currency, the euro.  While the euro was designed to reduce economic risk in Europe, it has instead dramatically raised risk levels in a region that remains a key component of the global economy.  Moreover, the euro looks set to remain a major threat to the global economy for the foreseeable future.

The simple reason why the euro has emerged as a major threat to the global economy is the fact that it was created too soon and allowed to spread to too many countries too quickly.  Furthermore, there was no system put in place to allow the Eurozone to become a fully-functioning monetary union, complete with structural reforms that could be enforced from the top down as well as actual fiscal transfers.  In fact, when the euro was launched, only a handful of European Union member states should have been allowed to adopt the common currency. 

Instead, the EU viewed the euro as a means of expressing Europe’s economic independence (particularly from the United States) and as a result, the euro was thus much more of a political project than the EU would ever admit.  As such, it was in the political interests of EU leaders to allow the euro to spread to as many European Union member states as was possible.  As a result, countries such as Italy and Greece were allowed to adopt the euro as their currency, even though they clearly were not fit to share the same currency as countries such as Germany and the Netherlands. Now, the euro has proven to be a currency that is too weak for northern exporters (resulting in massive trade surpluses in Germany and other northern countries) and too strong for southern Europe’s less-export-competitive economies.  Even with the recent weakness of the euro, this situation persists.

Given the too-early, too-rushed birth and expansion of the euro, it is little surprise that those countries that have adopted the euro have experienced a great deal of economic turbulence in recent years.  Moreover, it was no surprise that the countries suffering the highest level of turbulence were those that should not have been allowed to adopt the euro in the first place, most notably Greece and Italy.  As these countries were forced to share a currency with more competitive economies such as Germany, they experienced a dramatic decline in their economic competitiveness. 

The evidence for this is in the fact that Italy’s economic output has not risen in the 15 years since the euro entered into circulation, while Greece’s economy has declined by more than 5% since the adoption of the euro.  In fact, since the Euro was adopted, the average overall economic growth rate for the Eurozone has been just 1.0% and while the euro cannot be blamed for all of the economic woes in Europe, it has contributed to the instability and loss of confidence in many of the countries of the region.  Moreover, until 2014, the Euro was dramatically over-valued, further weakening the export competitiveness of economies that are increasingly dependent upon exports outside of Europe for their growth.

Over the past three years, the Euro was weakened significantly against the US dollar and many other currencies and this has eased some of the pressure on Eurozone member states as it has boosted their export competitiveness and resulted in somewhat higher levels of economic growth.  This has allowed European Union leaders to insist that the euro has a strong future and that all current Eurozone members will be able to keep the euro as their currency.  Interestingly, the one country where a majority of the population was opposed to the launch of the euro, Germany, is now the country where support for the euro has risen the most, thanks to the boost the weak euro has provided for German exporters (leading to record trade surpluses there). 

However, outside of Germany, opposition to the euro has risen dramatically, and this has helped to increase support for right-wing and left-wing political movements that have called for the euro to be replaced by domestic currencies.  Meanwhile, without a greater level of economic convergence within the Eurozone, the crises that have befallen these countries are likely to be repeated, forcing some countries to either drop the euro or become increasingly dependent upon financial aid from international lenders.  As a rapid convergence within the Eurozone is unlikely, the future of the euro remains uncertain, but the likelihood of more disruptions to the global economy remains highly likely.