The euro and the US dollar reaching parity is a noteworthy economic event, last seen two decades ago in November 2002. This near one-to-one exchange rate, while symbolically important, doesn’t fully reflect the euro’s underlying value against the dollar. Instead, the current parity is primarily driven by a stronger dollar, rather than a fundamentally weaker euro. The divergence in monetary policy between the United States and the Eurozone is the key factor. Interest rates in the US are rising at a much faster pace than in the euro area, significantly boosting the dollar’s value.
While the nominal euro dollar exchange rate has declined to unusually low levels, it’s crucial to consider the effective exchange rate. This measure, which reflects competitiveness, remains relatively stable. In fact, current levels are only slightly below the stable trend observed since before the 2008 financial crisis. This suggests that the Eurozone’s overall competitiveness hasn’t suffered a structural decline yet. However, this stability is not guaranteed and hinges on how the European Union navigates its rapid energy decoupling from Russia in the coming months.
Economists hold a complex view of currency depreciation. A weaker currency can boost exports by making them cheaper and more attractive in international markets, potentially opening up new market opportunities. However, persistent bottlenecks in global supply chains, a lingering effect of the pandemic, may limit exporters’ ability to fully capitalize on these price advantages. Conversely, a depreciating currency can signal economic weakness and fuel inflation by making imports more expensive. The overall economic impact depends on the interplay of these factors.
Beyond psychological thresholds, the break of euro dollar parity raises concerns for the Eurozone’s ambition to elevate the euro as a prominent global currency alongside the dollar.
The war in Ukraine has amplified the geopolitical significance of finance, effectively weaponizing currencies. From freezing Russian assets to disputes over gas payments in rubles, currencies have become powerful instruments of geopolitical leverage. A wider global use of the euro would enhance the EU’s capacity to influence international terms and conditions. Furthermore, with all euro transactions processed through its own settlement system, the EU could more effectively implement financial sanctions and freeze assets of adversaries.
The Eurozone economy accounts for approximately 15% of global GDP, while the US represents about 25%. The US financial system is roughly twice the size of the Eurozone’s. Outstanding US debt totals around $20 trillion, with a top-tier credit rating, whereas the Eurozone countries have about $10 trillion in outstanding debt, only $2 trillion of which holds the highest rating. The EU’s Recovery and Resilience Fund, established during the pandemic, will add €750 billion of high-quality debt, but this is still significantly less than the volume of high-quality US assets available globally.
These factors contribute to the US dollar’s dominant position as the world’s leading international currency, accounting for about 60% of global foreign reserves, compared to around 20% for the euro. China, with an economy and financial system comparable in size to the EU but a currency with limited international trading, presents a long-term challenge. However, with a massive population of 1.4 billion and higher growth rates than both the EU and the US, China possesses the potential to eventually challenge the dollar’s supremacy.
The crucial question for Europe is how to strategically promote the euro’s global role. A currency’s relative value is an outcome of economic fundamentals, not a policy target in itself. Artificially propping up the euro’s value is unsustainable and undesirable. Instead, a strong and resilient Eurozone economy is the foundation for a strong euro. Therefore, policies aimed at strengthening the Eurozone’s economic base are the most effective and sustainable approach.
Various proposals exist to bolster the euro’s international standing. However, external actors considering greater euro usage need assurance not just in individual Eurozone countries’ performance but also in the enduring stability and functionality of the Eurozone and EU institutions. Concerns arise when structural weaknesses within the monetary union hinder effective policymaking. The current risk of financial fragmentation within the Eurozone exemplifies this, posing significant challenges for the European Central Bank in its dual mandate of maintaining financial and monetary stability.
Ultimately, the persistent uncertainty surrounding the euro’s long-term future is a major impediment to its broader international adoption. Until this fundamental issue is addressed, the US dollar is likely to maintain its hegemonic position in the global financial system, and the euro dollar parity will remain a point of economic and political discussion.
