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Mar
05

Will the Euro Currency Bloc Fail?

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Twenty-seven European nations currently belong to the European Union, a loosely-woven partnership designed to empower Europe’s competitiveness with the United States, China, and India. Sixteen of the EU’s member nations have adopted the euro as their official currency, and five other European states unofficially use the euro.

As continental Europe forged its economic partnership, leaders hoped adoption of a single currency would protect the member states against radical fluctuations in the value of their national currencies and would serve to protect their national credit ratings. In the EU’s brief history, the euro has fulfilled members’ hopes. Recently, however, precipitous declines in several member states’ economies have triggered sharp drops in the euro’s value and raised new doubts about the long-term advantage of an international currency.

In theory, the use of a uniform currency facilitates the flow of goods and services across international boundaries, sustaining the Eurozone as the world’s second largest economy. Just as importantly, robust economies in the EU’s member states maintain the value of currencies tied to the euro-especially in emerging African nations.

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The consensus of analysts that an appreciation of 10% in the euro exchange rate is causing a decline of one percentage point growth in the euro zone during the last two years, with a special emphasis in the second period. ‘Maintaining a high euro reduces Europe’s ability to generate wealth, and that makes it a less competitive area, explains a specialists of the euro economy. But in reality, this impact is not as easy to define, since it involves many nuances. For example: a strong currency attracts foreign investments in all asset classes. Another, the oil that is traded in dollars, has risen 95% in a year and a half, but the cost measured in euros has increased by 33%.

To what extent is damaging the appreciation against the dollar?

Very important, but not as much as it used to be in the past. The USA is no longer the largest trading partner on the bloc. The United Kingdom accounts for 16% of the exports of the euro area, while the U.S. equivalent to 14% and the rest is divided among various partners. ‘The most relevant to the regional economy is not crossing against the dollar, but the effective exchange rate, against major trading partners,’ says Anton Brender, Chief Economist at Dexia Asset Management. ‘An ideal combination would be a slight appreciation against the dollar, which would reduce the oil bill, and depreciation against other currencies, “suggests Brender. But, of course, that perfect combination is something that currently is not happening.

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Modern historiography specialists have long argued that an essential segment in the study of human evolution is inextricably tied to the basic understanding that societies generally emerge, progress and fall cyclically. Such frequency in social evolution is not just a consequence of endogenous factors, it also results from the impact of the external environment, be it close – neighboring constituencies vying for the same resources – or far – as part of a larger geographical area.

History teaches us another fundamental truth, predominantly unveiled in social sciences: humans are inherently prone to believing in the danger of the unknown, the fear that uncertainty – when present in life – brings an intolerable level of complexity in handling daily activities. Economists, in tandem with the larger group of social scientists, ascribe the word “risk” to this angst.

Risk lies in everyday life. From birth to death and in between the terrestrial episode called life, humans experience a sophisticated relationship with risk and utilize it as a powerful catalyst to furthering their interests. We fear the unknown not just in temporal terms – e.g.: what will tomorrow be? – but also in more practical, present-day terms, that is, what will happen today?

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