If the euro really is on the verge of collapse, as many pundits are now proclaiming, how come it is still so highly valued against other currencies, including the U.S. dollar?
That may sound like a crazy question, given the euro’s much-publicized decline over the past couple of weeks. It has been dropping as the possibility grows that Greece may seek to pull out of the 17-nation currency union following parliamentary elections there in mid-June. That scenario of a “Grexit” has spooked financial markets and pushed governments and business around Europe to draw up contingency plans.
Yet looked at from a longer perspective than last week, the euro is in fact still pretty expensive. On foreign exchange markets, one euro today buys about $1.25. That’s more than 6 percent above the $1.17 rate in January 1999, when the euro was first introduced as an accounting currency. Back then, it got off to a weaker start even than Facebook’s IPO and quickly fell below parity to the dollar. On Jan. 1, 2002, when euro notes and coins were introduced into general circulation, one euro bought just 90 U.S. cents. It then dropped to a low point of 86 cents in March of that year. That’s 30 percent below where it is today. This chart from the ECB website shows the full picture since the euro’s introduction:
And it’s not just against the dollar that the euro remains relatively strong. The trade-weighted value of the euro against the currencies of the 20 countries that are the European Union’s leading commercial partners shows the same trend. On this index, too, the euro tracks today at a level that is about its midpoint over the 12 years of its existence, far from its historic low.
So what does this mean? If you believe that markets are rational, there are three possible conclusions: