Challenges For The Euro Exchange Rate in Times of Crisis

Challenges For The Euro Exchange Rate in Times of Crisis

During the years, scholars, acting CEOs and Forex market players wrote piles of books devoted to the challenges the euro is facing or will face in the future. Some of them insisted that the euro is an artificial currency, which will fail to survive the first more serious financial crisis. Others claimed that the single European currency is destined to prevail over all other major world currencies. The truth is somewhere inbetween these contrasting statements.

The euro achieved a generally accepted status as a leading currency in less than a decade. It also challenges the position of the U.S. dollar as the world's top reserve currency. The euro managed to maintain relative stability and a high euro exchange rate against other leading currencies. Nevertheless, the euro faces many challenges in the years to come.

According to Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB, the three main challenges for the euro area are the following: implementation of structural reforms that will eliminate cross-country differences in real economic performance, introduction of stricter financial discipline in the sphere of public finances and adoption of stricter policies for risk management in the financial sector. Whether these policies will be successfully implemented is an open question but the euro exchange rate will depend heavily on such measures. It is an elementary truth that the economic performance is the main pillar of a stable exchange rate so the first challenge mentioned should be a priority, analysts agree.

Another factor that would assist the euro in maintaining a higher exchange rate is the elimination of public and private imbalances, an indicator closely watched by the European Central Bank and the finance ministers of the countries in the Eurozone. In addition, the role of the ECB is not only to guard the euro but also to contribute to the global economic governance, as described by the ECB Chairman Jean-Claude Trichet.

This means that sometimes the ECB could be forced to intervene in the market to support not only the single European currency but the global financial stability as well. The euro will face this new and challenging role in the years to come and the euro exchange rate against the other major currencies will be a factor of increasing importance to the future of the global financial world.

The markets determine the value of a particular currency but the market players' behaviour is influenced by decisions taken at a political level. Trading currency pairs is a game for professionals although their decisions rely on policies implemented by governments. Therefore, the main challenges for the euro are related to the implementation of well-considered and reasonable policies by the governments of the countries in the Eurozone. During the peak of the global crisis, the euro managed to survive and enjoyed relatively moderate fluctuations; the serious challenges are thought to be still ahead.

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