As a result, foreign currency bonds have a poor risk-return profile for most investors. Before the euro, successful companies in countries with weak currencies still had to pay high interest rates. On the other hand, less efficient firms in nations with stable currencies enjoyed relatively low interest rates. The primary risk in lending across borders was the currency risk, instead of default risk. With the euro, investors in low interest rate countries, such as Germany and the Netherlands, were able to lend money to firms in other eurozone countries without currency risk.
In theory, the euro should help countries that adopt it to support each other during a crisis. The currencies of countries with larger economies tend to be more stable because they can spread risk more effectively.
For example, even a prosperous small Caribbean country can be devastated by a hurricane. On the other hand, the U.
As a result, the U. The global crisis tested mutual support within the eurozone in Initially, there was not enough collective action. Even worse, many nations closed their borders to each other.
However, the European Central Bank consistently bought up enough debt in afflicted countries, especially Italy, to keep interest rates relatively low. More importantly, France and Germany supported a recovery fund worth over billion euros. By far, the largest drawback of the euro is a single monetary policy that often does not fit local economic conditions.
It is common for parts of the EU to be prospering, with high growth and low unemployment. In contrast, others suffer from prolonged economic downturns and high unemployment. The classic Keynesian solutions for these problems are entirely different. The high growth country ought to have high interest rates to prevent inflation, overheating, and an eventual economic crash.
The low growth country should lower interest rates to stimulate borrowing. In theory, countries with high unemployment do not need to worry much about inflation because of the availability of the unemployed to produce more goods. Unfortunately, interest rates cannot be simultaneously raised in the high growth country and lowered in the low growth country when they have a single currency like the euro.
In fact, the euro caused precisely the opposite of standard economic policy to be implemented during the European sovereign debt crisis. As growth slowed and unemployment increased in countries like Italy and Greece, investors feared for their solvency, driving up interest rates.
Typically, there would be no solvency fears for governments under a fiat money regime because the national government could order the central bank to print more money. However, the European Central Bank's independence meant printing money was not an option for eurozone governments. Higher interest rates increased unemployment and even caused deflation and negative economic growth in some countries.
It would be fair to say that the euro contributed to an economic depression in Greece. The first stage of the euro was the European exchange rate mechanism ERM , under which prospective future members of the eurozone fixed their exchange rates to the German mark.
Germany has the largest economy in the eurozone and had a history of sound monetary policy since World War II. However, pegging exchange rates to the German mark may have created a bias in favor of Germany. The idea that the euro favors Germany is politically controversial, but there is some support for it. Geithner keeps up pressure on Europe EU leaders to decide Europe's future World feels effects of eurozone crisis Spain and Greece have to make similar changes now, but of course there is no growth to carry their economies forward.
Germany has long been the economic powerhouse of Europe, but the nation is not immune from the global financial crisis. It is the continent's largest economy, but it also has a high rate of government debt, at Much of Germany's might comes from its strong manufacturing sector, which has meant that, unlike many of its neighbors, the country has not had to rely on the financial services industry or the property market, both of which have been badly hit by the global economic crisis.
But experts warn that Germany, which relies heavily on trade with China, may be highly exposed to any future trouble in the Asian markets. And Dr Christoph Meyer, senior lecturer in European and international studies at King's College London, said despite its success so far, the German economy was not bulletproof. Chancellor Angela Merkel has insisted even those outside the eurozone must do their bit to resolve the crisis. Experts say it is inevitable that there is a degree of resentment on the part of German citizens, when faced with the responsibility of clearing up another neighbor's mess.
He added that while the crisis had initially hit Merkel's popularity among voters, her approval ratings had risen in recent months. The eurozone crisis has provided plenty of fodder for eurosceptic media and politicians across the continent, with many press reports feeding off old tensions and rivalries.
Loughlin said claims in anti-German sections of the media in Britain and elsewhere that the country is "trying to take over Europe" were used by politicians to boost their standing at home, but could do real damage to international relations.
Is there a danger the eurozone crisis could derail Germany's economy? The Austrians were also rather fond of their Schilling. But it was auf Wiedersehen to the old and in with the new.
In reality the true birth of the euro took place in Technically, the mark and other European currencies were just tandem partners to the euro, the true legal tender in all of the euro zone nations. Save on international money transfers! But the euro exchange rate later plunged below a dollar, reaching a record low of The chart begins with because that was the year when the euro went into circulation as a cash currency.
What do you know about the euro? The last time one US dollar equaled one euro was in , the first year the new European currency was in circulation. The rapid fall of the euro in early caused Deutsche Bank to revise its outlook, predicting euro-dollar parity by the end of The Swiss franc was at dollar parity or slightly higher, but it had already reached that point in March , dropping from previous highs versus the euro and the dollar.
The Greek Crisis In early , it was discovered that Greece had been cooking its books and was in serious financial trouble, forcing other eurozone countries to deal with a possible national bankruptcy. Several other EU members Italy, Portugal, Spain had troubled economies suffering from the worldwide recession.
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