EC Is The Euro Dying? Analysis Of EUR/USD And EUR/GBP

Is the euro dying?

First of all, it has to be said that the crash theories surrounding the universally disliked euro are nothing new. Since 2008, these theories have been haunting the financial press like the Hound of Baskerville on Dartmoor. Until now, however, we can only state one thing, that it's still alive. The fact is, even 13 years after the 2008 crisis, the new currency continues to hold. To assess the likelihood of the euro's demise, let's first address the question:

Has the euro worked so far?

There are two sides to this question. Has the euro worked on a theoretical economic level, and has the euro worked for citizens? Let's address the latter problem first. The euro has been relatively stable compared to other major currencies such as the dollar, yen, and sterling. Inflation was significantly higher in the days of the Deutschmark than after the introduction of the euro. The interest rate on savings deposits may have shrunk continuously since 2008, but this is not a euro phenomenon, but classic savers in countries such as the U.S., Japan, and the U.K. have also seen the last few years no country. For the consumer, then, it is fair to say that the euro is working. On an economic, academic level, one can, of course, initiate other discussions and outline doomsday scenarios such as higher inflation due to the expanded money supply.

Is higher inflation looming?

Inflation scenarios were already spread after the 2008 crisis, but these did not come true, even though the money supply increased. In economic terms, the Corona crisis and the effects of fiscal policy measures are both a demand and a supply shock. While the supply shock generally pushes prices up, the demand side has a deflationary impact and depresses prices. Here, an equilibrium could emerge so that no excessive inflation occurs. Another point is the sharp rise in government debt, which could pose a risk. Here too, we had a surge in the public debt ratio after the 2008 crisis that can be compared with that of the Corona crisis, which has not led to significant inflation. Higher unemployment and structural changes (higher digitalization and lower mobility) are more likely to have a deflationary effect in real economic terms. To the extent that increased government debt counteracts the collapse in demand, as is the case in the wake of the pandemic, this does not have to lead to increased inflation; instead, it is used to correct a deflationary trend. However, these are points that have nothing specifically to do with the euro and are treated the same way in other countries. We therefore see deflation rather than inflation looming.

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