Daniel Gros is Director of the
Center for European Policy Studies. He wrote an article to express his unease
about the rise of the Euro.
By the way, it happened that
when the Euro was first adopted as the currency of the European Union in 1999,
it was given a par value of 1 to 1 with the American dollar. It was also called
the Euro Dollar to distinguish it from everything else that was European.
In time, however, everything
pertaining to Europe, dropped the Euro designation, leaving its use only for
the currency. This is why the word “Euro” has come to mean the European unit of
currency and nothing else. Today, one Euro converts into one American dollar
plus 18 cents, and the gap continues to widen in favor of the Euro. This is why
Daniel Gros is sounding the alarm. It is not that he is worried the American
currency is sinking; it is that he is worried the European competitiveness is
sinking as a result of the rise in the Euro.
But how did the paradigm begin
to shift? It all began when Europe was seen to have managed the COVID-19
pandemic wisely whereas America managed it foolishly. The result is that Europe
maintained its economic indicators, especially the level of employment, steady.
At the same time, however, America saw its economic indicators, especially the
level of employment, deteriorate. This has increased the confidence of
investors throughout the world in the European economy, thus began the bidding
for the Euro, and its rise in value.
Whereas mismanagement of the
pandemic has played a role in creating the current situation, there exist
structural reasons in both economies for this to have happened, says Daniel
Gros. In fact, he cites two main reasons. One is that the dollar is used as the
reserve currency by most nations, which means that people and companies the
world over, trade goods and services using the dollar as medium of exchange.
The result, says Daniel Gros, is that people around the world, have the
incentive to maintain the dollar at a stable value for as long as they can,
even when their own local currencies fluctuate.
The other reason, says Gros,
is that Europe has a more open economy, making it dependent on export to the
tune of 30% of its GDP, whereas America depends on export only to the tune of
12% of its GDP. This makes Europe more sensitive to the changing expectations
of the international investors. At this time, the investors are up on the Euro
and down on the dollar, which is reflected in the value of the two currencies.
This raises the question as to
whether the current phenomenon is temporary or it is the harbinger of a new
paradigm that's beginning to manifest itself. Well, if there is a lesson to be
learned from what has unfolded so far, it is that when you are so cogent as to
make your presence felt worldwide, every move you make affects not only those
around you, but yourself as well because you cannot avoid being rocked by the
waves you create. With this in mind, we parse the current situation and see
where it leads.
Brutally stated, it all means
that in the same way America is now feeling the effect of its mismanagement of
the COVID-19 pandemic, it will feel the effect of its mismanagement of the
economic relations it has been shaping of late with the rest of the world. That
is, every move that America has made in trading with its partners, as well as
every act in terms of sanctions, it has taken to punish those it does not like
for whatever reason –– will ricochet and come back to haunt America in a way
that can only be destructive.
This will further shake the
confidence of investors in the dollar whose store of value will diminish in
their eyes. And so, maintaining the dollar as a reserve currency or using it as
a medium to facilitate the exchange in goods and services, will make less and
less sense with the passage of time. Now, given that the world is awash with
dollars, when the dumping of it will start and everyone will head for the exit
at the same time, the rush will make Iran, Venezuela and North Korea look like
paragons of stability.
Will that melt the American
economy and bring it down to zero? No, it will not do so for the simple reason
that America will not see the wholesale destruction of its means of production.
There will still be mining, agriculture, manufacturing, construction and the
related services such as transportation and storage. There will also be
government services, healthcare, education, the leisure industries, even the
financial services.