The future of the euro amidst surrounding risks

• The Euro is the second most traded currency in the world, which makes talking about the future of the Euro process important for traders.
• Traditionally, the value of the Euro has remained higher than the dollar, except for some periods that will become clear in the current article that explains those reasons.
• The future of the Euro is surrounded by a range of risks, including both internal and external economic challenges, as well as geopolitical uncertainties.

The Future of the Euro: The Euro Price Between Rise and Slippage and the Reasons!

The Euro is the second most widely used currency in the world, as it is used by about 341 million people daily, according to data from the European Union, and according to that data as well, the Euro is the official currency of twenty countries out of 27 member states of the European Union that together form the Eurozone (1).

Chart (1) - The Future of the Euro: Price Movements of the Euro Since Its Launch in 2002

Since the start of trading of this currency in 2002, i.e. three years after its invisible launch, its start was remarkable in an upward direction, as it jumped almost from levels of less than one dollar per euro, to its highest historical levels that were never repeated, when it touched levels of 1.6 dollars per euro for the first time in April 2004 (3).

Since that date, which coincided with the global financial crisis, which was considered the worst economic event since the Great Depression in 1929, the euro witnessed a deterioration in its value at different stages of time, which analysts explained and presented the main reasons behind it, the most prominent of which were (4):

- Cheap credit that preceded the global financial crisis, represented by the decline in interest rates on the euro.

- High levels of debt paid with low interest.

- Rising asset prices driven by rising levels of debt that were feeding purchasing power in a big way.

- Rising asset prices were a major factor in achieving rapid unsustainable growth.

The performance of interest rates before the 2008 financial crisis in the Eurozone can be seen in the figure below (5):

Chart 2 - The Future of the Euro: The Euro's Interest Rate Path

Despite the Euro's return to rise in 2009, it has repeatedly relapsed, due to the deep recession that hit some European Union countries, and the high debts that led others to very deep crises, most notably Greece.

The Euro remained floundering in its performance between rising and rising until 2014, when it recorded its last high performance, touching $1.4 per euro, and then began to decline due to many reasons, the most prominent of which were:

- The rise of the Chinese dragon, and fears of the Chinese economic threat, which pushed towards the dollar as a safe haven.

- The rise in US economic growth and the Federal Reserve's determination to raise interest rates, which led to the dollar index rising to 100 points for the first time since 2003 (6)

The Euro in the Battle of Interest and Inflation:

We move in time to 2022, as it was the year in which the European Central Bank began raising interest rates to 4% due to the inflation problem that exceeded 10% in the Eurozone.

Where the euro can be observed rising against the dollar, from levels below one dollar, to levels approaching the barrier of $ 1.12 per euro.

But these levels, during the year 2024, returned to confusion again, driven by the European Central Bank's launch of reducing interest rates before the US Federal Reserve's move, whether in terms of the time factor or the size of the reduction itself.

If the European Central Bank reduced interest rates three times by a quarter of a percentage point, with the possibility of reducing interest rates for a final time at its last meeting on December 12, compared to one reduction by the Federal Reserve by half a percentage point during its meeting in September.

The euro fell from levels touching 1.11 to levels of 1.08 dollars per euro, especially in light of the decline in inflation rates on the European side and their slide below the target rate set at 2%, compared to the stubbornness of US inflation, which may force the Federal Reserve to be more patient regarding other deep cuts after its decision to reduce interest rates by half a full point at the September meeting.

The future of the euro considering the surrounding risks!

The above was a review of the most important stages of the euro and the reasons for the price movements that occurred during them, but the current situation surrounding the euro may put it to a very difficult test.

We will review below some of the most important risks that may pose a threat to the euro in the near to medium future.

First. High levels of savings:

The savings rate usually expresses the individual's openness to keeping money instead of investing it for many reasons, the most prominent of which is the high state of uncertainty among that individual and the low confidence in the reality of the economy of the country in which he lives.

According to economic data, the household savings rate in the Eurozone is rising dramatically, according to the World Economic Forum.

The forum also confirmed that European households are saving at their highest rates in years, exceeding pre-pandemic savings rates.

The savings rate during the second quarter of 2024 reached 15.7%, which is higher than the 15.2% recorded during the first quarter of the same year, and even higher than the 12% levels that the data was at before the pandemic.

This can be seen in the giants of Europe, namely Germany and France, where savings rates reached huge levels, reaching 21.23% and 17.08%, respectively.

Second. Decline in investment rates:

This point complements what came before it, that is, the increase in the savings rate was accompanied by a natural decrease in the investment rate, which fell to 9.2% during the second quarter of 2024, compared to levels above 10% recorded years ago. (7)

Third. Geopolitical and economic shocks:

Despite the optimistic talk about the European Union's ability to improve and cohesion during the years 2024 and 2025, according to the European Commission, geopolitical risks are pushing the eurozone into the unknown.

The geopolitical tensions in the region that began in 2022, with the unrest between Russia and Ukraine, constitute another potential source of macroeconomic shocks for Europe.

In addition, tense relations with China may harm the eurozone, which is the most prominent trading partner and a vital market for the European economy in general.

The latest of these disturbances was the imposition of customs duties by the European Union on electric vehicles manufactured in China, which revealed noticeable internal divisions within the union between those who support these duties and those who strongly oppose them, led by Germany (8).

Germany has warned of a violent reaction that China may take towards these fees, which may greatly harm the European economy.

The threat related to the performance of the US dollar in light of the stubborn economic data on the inflation front on the one hand, and US economic policies towards future trade relations.

Fourth. The position of the US Federal Reserve:

While the inflation rate in the Eurozone was falling below the target levels in September, recording 1.7% before rising again to 2% in the October reading, inflation on the US side was holding steady at 2.4% during the October reading, which reflects the ability of the Federal Reserve to hold high interest rates for a longer period.

As interest rates stand at 5% by the end of October 2024, with the possibility of falling to 4.5% by the end of this year.

While interest rates in the Eurozone may reach 3% by the end of 2024, especially at the next European Central Bank meeting on December 12.

This gap between US and European interest rates could create a price slide for the euro against the dollar, which is what happened in 2022, when the European Central Bank delayed the Federal Reserve by about six months in raising interest rates, when the euro slipped below the dollar, specifically in October of that year.

Conclusion:

These were some of the risks that should be monitored in the coming periods, most notably geopolitical risks and relations with China, European economic data such as savings, investment rates, income and debt, in addition to monitoring interest rates on both the American and European sides.

These problems and risks represent a real dilemma for the euro if they are not addressed or closely monitored on a regular basis.

Sources:

(1) Countries using the euro | European Union

(2) Euro – history and purpose | European Union

(3) www.tradingview.com

(4) Financial stability and risks to growth in the euro area: where do we stand? | European Stability Mechanism

(5) European Central Bank Cuts Rates for Second Time in Three Months - The New York Times

(6) Why The Euro Fell To A 9-Year Low Against The Dollar : The Two-Way : NPR

(7) Europeans are clinging to their savings. What does it mean for growth? | World Economic Forum

(8) Europe Imposes Higher Tariffs on Electric Vehicles Made in China - The New York Times