Europe. Opposed realities, same currency

When the euro was born in the late 90's everybody (except for the UK and Sweden) thought that adopting it was the best way to boost the European Union (EU), to establish it as a competing power to the supremacy of the United States and its reference currency, the US Dollar. It was expected to facilitate intra-EU commerce and tourism, ease the access to credit and financial instruments and making them more stable at the same time. Purchasing power and exports-imports from EU companies would benefit from having a better reference instrument to compare their money against the rest of the world currencies, lowering the risk introduced by exchange rates fluctuation worldwide. It really had all of those benefits, at least at the beginning... 

As a counterpart, the introduction of the euro raised the perception of inflation for the people in most of the countries who adopted it due to abusive rounding practices. Inflation indices did not show this trend due to it being limited to cheap goods, but purchasing power of the population was slightly hit by that. Anyway that was never a problem because in 2002, when the euro was physically introduced, Europe and the world were fully immersed in an unprecedented phase of economic growth. During that phase the euro kept appreciating against the rest of the world currencies (see graphic below), but nobody seemed to care because of the non-stop growth.

EUR exchange rate against USD, GBP and JPY (credit Wikipedia)

The strongest euro ever

But what happened when the global scenario changed? The fierce financial crisis turned everything upside down, except for the exchange rates against the euro... The euro has kept being strong until now, too strong for some. This strength, specially against the USD, poses a serious threat to, among others, the biggest economy in Europe, Germany. Net exporter countries like Germany, Denmark, Finland or France cannot possibly be interested in having a currency that heavily penalizes their own exports. And with Germany and France being the big muscles that move the entire EU, it becomes a really challenging situation for everyone involved.

Net importer countries on the other side are enjoying cheaper goods from outside the EU which is making their local pains more bearable on the short term; but this could backfire in the long term if Germany imposes their (untold) will and the euro goes down. Importers do not worry about making their industries competitive because it is now more comfortable and cheaper to buy everything from China or the USA. But if the euro was to turn around and began to lose ground against other currencies these importer countries would be left in a very difficult position. They would find themselves paying more for their imports and not having enough industrial muscle to compensate for this with a precious growing in the number of their exports. 

With interest rates between 0.25% and 1.50% they could continue with their highly debatable strategy of issuing more and more national debt to allow for this vicious circle to go on; but interest rates will not, neither they should, be low indefinitely, which would penalize this already flawed strategy and dig their hole deeper.

A fragmented union

Truth is, the euro is only guilty by association in this matter, the real problem is that as of today  European countries are too different to share anything money-related without this creating tensions between them. I am not only talking about currency, but also about fiscal and monetary, policies. The needs of the countries forming the EU are so opposed that in its actual form the euro simply does not make sense. To solve this the EU can go two opposite ways. The first one is to make the union more homogeneous, as that would make the euro more adequate for more members. However to do that a complete overhaul of some countries would be needed. Heavy  structural changes and strict economic control should take place in the weak euro countries (clear examples are Portugal, Ireland, Italy, Greece, Belgium and Spain) for this to work. But this solution would take time and a lot more money from the strong countries. Are they willing to do that extra sacrifice? Probably not.

This takes us to the second solution, splitting the euro into two different currencies. And this solution deserves its own post, which will come in the following days.