Daily Management Review

Why is the ECB concerned about the strong euro?


The euro’s value began to grow again and on Tuesday, August 29, reached the level of 1.20 against the dollar. In part, this reflects the restored health of the European economy. Also, this is a result of a return to pro-European politics. However, some in the European Central Bank are concerned about this acceleration of growth.

World Economic Forum
World Economic Forum
Several months ago, the euro resumed its growth, and reached the level of 1.20 against the dollar on August, 29. It’s not the first time, but some aspects are different this time. The currency cost a little less on the first day of its existence, on January 4, 1999, and a little more in those days when there were no investors willing to bet on its future, in July 2012. The euro cost exactly the same amount in early 2015, when the European Central Bank, led by Mario Draghi, was about to declare a probably daring operation: a campaign to create a currency for the purchase of public and private securities, thanks to which its investment portfolio increased by more than two trillion euros.

In fact, the euro has already been at this level, so that one could see a certain final verdict in the overcoming of this threshold. The currency’s way is impressive: in March 2014, the euro was worth $ 1.39 - much more than now. Then, a year later its value fell well below the existing level. This depreciation by 25% resulted from decisions taken by the European Central Bank, the same decisions that we owe to today's rehabilitation of the euro.

Consequently, there are reasons for concern, since the European currency and exports once again become more expensive in foreign markets. At the moment, there are not too many reasons to fret. In part, it is just a reflection of the fact that the state of the European economy is now better than two years ago. Recovery in the euro area is lagging behind the United States, unemployment is at a higher level, factories are not working in full-fledged mode, but medium growth has outpaced the US in the past year. Since next year, the European Central Bank is likely to reduce, and subsequently stop, acquisitions on the market - now this is not necessary. So, there will be nothing surprising that the euro will return to the same level as before the beginning of these acquisitions.

This time, however, there is the factor of politics that influences the euro’s value. Ferruccio de Bortoli, an Italian journalist, said that voters regard antisystemic proposals a little unbelievable; in comparison with the unrest in London in connection with Brexit or with the Washington of the Trump era, suddenly the euro zone appears to be an island of stability.

It is no coincidence that the European Union’s currency began to bypass the dollar in April, when it became clear that the French had chosen Emmanuel Macron; euro had already grown by 3% between the first round of presidential elections and the inauguration. Besides, advance of the euro’s opponents in Italy did not lead to any positive results, and the elections will not be held soon. They would have laughed at these words many months ago, but today the euro zone is a quiet harbor, a reliable pier for the West.

All this set of factors returns the European currency to its fundamental values of the last 20 years. Do not forget that the euro is largely popular only thanks to the huge surplus in the zone (mostly in Germany) in exchange with other economies.

The risk now is to consider all this as a simple business, an exceptional norm of recovery. The exchange rate is changing so quickly that the European Central Bank has already begun to worry about continuation of this trend. There is also a question concerning Italy, because the speed of recovery there is twice lower. Until August 29, when the euro-zone as a whole was to be pulled out of a double-dip recession, the European Central Bank's line and the exchange rate were ideal only for the slowest car.

source: corriere.it