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25 November 2013

The strong euro puzzle 

As the eurozone economy gradually recovers from the financial crisis, exporters are hoping for better days ahead. Yet their hopes may be frustrated by the continued strength of the euro, despite episodes of sharp decline against the U.S. dollar following the sovereign debt shocks of the past two years.

The euro rebounded from these dips because currency markets recognize that the U.S. Federal Reserve has much greater flexibility to drive down the value of the dollar to improve the export prospects of American firms.  

It’s easy to forget now that at the height of the debt crisis that gripped Greece, Spain, Portugal and other eurozone members, confidence in the single currency was shaken badly, and many analysts predicted it would collapse altogether.  

Then Mario Draghi, president of the European Central Bank, declared in July 2012 that the ECB would do “whatever it takes” to preserve the euro. While that bold statement of purpose restored confidence, it was just one of three powerful forces that are keeping the euro's value high. 

The second is lack of clarity from the U.S. Federal Reserve on when it might start to rein in its program of quantitative easing, which essentially devalues the world’s reserve currency against all its competitors, including the euro. 

The third force is the often-overlooked underlying strength of the eurozone’s economic infrastructure. Even with all Europe's demographic and fiscal challenges, it has a solid manufacturing base, excellent universities, innovative hi-tech industries and a well-educated workforce.  

Ultimately the strong euro is a vote of confidence in the economy and governance of the eurozone – not that it will cheer exporters much.