The Future of the Euro

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The Future of the Euro

Although the value of the euro has decreased by up to 25% since its birth, one could argue that its value was a bit too high to start with. In 2000, its value was beginning to level off and, as Anatole Kaletsky writing in the Times noted, the conditions were turning in its favour. In 2009 it reached an all time high before dropping back.

Statistic: Euro (EUR) to British pound sterling (GBP) average annual exchange rate from 1999 to 2015 | Statista
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First, EU real growth is picking up at a time where there are signs that the USA might be growing less quickly. Secondly, the fact that the euro is so low at the moment means that the Euro-land economies now have improved price competitiveness. This will help them export, which should help the euro. The main point holding the euro back is the fact that the ECB has such a deflationary philosophy. If it would allow the Euro-land economies to grow a little more, this would also help the euro rise in value.

Will the euro work in the long run?

The Future of the Euro

Politically, the leaders of the participating countries are totally committed, but will the economics keep working?

There will be no economic costs in Euro-land if any one of the following conditions is met:

  1. All economic cycles are synchronised.
  2. There is perfect wage and price flexibility.
  3. There is perfect goods and labour mobility.
  4. There are fiscal transfers between participating countries.

Remember, if any one of these four conditions is met, the euro will work fine forever. Unfortunately, at the moment none of them are true! In the USA, although, as we discussed earlier, the different states are like different economies, conditions 2, 3 and 4 all occur between states.

Given the problems of convergence, flexibility and mobility mentioned earlier, the best hope for Euro-land is the fiscal transfers. But this requires a tax raising central government of Europe.

How many countries will go for that?