| The meek, Jesus famously assured us, shall inherit the Earth. European policymakers’ recent pronouncements, however, suggest they profoundly disagree with the Messiah.
Barely a single speech by EU leaders or officials these days fails to emphasise Europe’s underlying strength, resilience, or solidity. Policymakers also routinely stress the importance of Europe’s robust institutions, firm decisions, and the (latent) power of its single market.
The EU’s rhetorical muscle was on full display this week, when Danish premier Mette Frederiksen mentioned the word “strong” or “strength” eight times in a speech to MEPs unveiling her country’s EU Council presidency programme. Tellingly, Denmark’s official slogan for its six-month chairmanship is: “A strong Europe in a changing world”.
Paschal Donohoe, Eurogroup president, similarly called for a “stronger and more competitive euro area” to “further enhance our resilience” and “reinforce the international role of the euro” shortly after his re-election as chair of the (genuinely) powerful forum on Monday.
Claims of Europe’s actual or potential strength are, clearly, justified in many areas. Europe does, after all, have resilient institutions; and it should harness the economic and financial power of its citizens and companies.
However, such assertions are much more controversial – and potentially disastrous – when applied to the euro itself.
Many of the problems associated with a stronger currency are already visible. The euro’s value has surged in recent months, rising more than 13% against the dollar and more than 11% against the Chinese yuan since the start of the year.
The increase is, in part, a show of confidence in the currency. Investors, concerned at US President Donald Trump’s erratic policymaking, have sought to diversify their holdings away from dollar-dominated assets. For many, Europe seems a far safer place to park their money.
Unfortunately, these exchange-rate fluctuations are also causing growing headaches for European businesses and policymakers.
First, by raising the ‘price’ of European exports relative to their American and Chinese competitors, a stronger euro has exacerbated EU exporters’ woes at a time when Trump’s sweeping tariffs and fierce Chinese competition are inflicting serious economic pain.
Second, and relatedly, a stronger currency has rendered imports into Europe considerably cheaper, thus incentivising consumers to purchase foreign products instead of domestic goods.
This latter effect is, naturally, good for ordinary citizens. But it is also disastrous for businesses, especially in export-oriented industries such as automotive and pharmaceutical manufacturing.
For policymakers, it also means that inflation, which has only recently been tamed after three years of painfully high prices, now risks undershooting the European Central Bank’s 2% target.
Exorbitant privilege – or execrable burden?
Unfortunately, these issues would likely only become even more severe if the euro eventually displaced the dollar to earn the “exorbitant privilege” of being the world’s reserve currency.
For while the dollar’s dominance has allowed the US to borrow at exceedingly low rates (owing to the massive global demand for dollar-denominated assets), it has also harmed US businesses and, arguably, contributed to America’s decades-long industrial decline. | 