The challenges for the Euro exchange rate arise out of the Euros’ origin, its use, and the troubles of the Eurozone, the independent countries where it is used.
The Eurozone is a financial entity, not a political one. Not all the countries of the European Union use the Euro; sixteen of the twenty-seven member states do not. Five nations that are not a part of the EU use it as well. Many more states use currencies pegged to the Euro, that rise as it rises and fall as it falls.
The organizers of the European Union damped opposition by carefully separating the advantages of a shared currency from the perceived disadvantages of shared rule. The union happened, and the Euro was born.
However, it is a currency largely unsupported by political power. Weak administration leaves the euro helpless against the mildest attacks. Yet the current threats to Europe’s currency are not mild.
Greece, Ireland, Portugal, Spain, and Italy
Currency crises are occurring in each of these countries, or seem immanent. Nations not in crisis, such as Germany, are unwilling to help states with seemingly corrupt governments, like Greece, or with apparently overleveraged banks, like Ireland. Charity begins at home.
Yet a common currency may doom the Eurozone nations to a common fate. If Greece goes down into chaos, or any other struggling country does, perhaps it will pull all of Europe with it. This dichotomy is certainly a danger, and among the challenges for the Euro exchange rate to overcome.
Anyone can bet against the euro. Sitting in front of the TV, watching riots in Athens or Ireland, it’s easy to form an opinion. To act on it, anyone can buy, on ordinary stock markets, instruments like UUP, which bets in favor of the dollar.
More sophisticated ways to bet against the euro exist as well. The simplicity of accessing the Foreign Exchange markets, the Forex, is astonishing. The accumulating bets against the euro are more challenges for the Euro exchange rate.
The English economist John Maynard Keynes saw an end to some kinds of economic turmoil in devaluation. Make your local currency less valuable and your exports become cheaper, more attractive to foreign buyers. Imports become more expensive, so local shoppers spend their money on locally produced goods. It helps the national economy, though perhaps at the expense of neighboring states.
Yet the troubled countries of the Eurozone cannot unilaterally devalue. Ireland’s money is stuck at the same value as that of relatively prosperous Germany. Therefore, some economists now suggest a splitting of the Eurozone, and a return for each country to its own currency, under its own control.
Economic crises in member countries, the ease of betting against the Euro, and the idea that each country might fare better if it went its own way are all challenges for the euro exchange rate. Of these, the idea of idea of each nation controlling and managing its own money may be the most dangerous. Monetary disunion could be the deadliest of the challenges for the Euro exchange rate because it seems to make the most sense.