As it stands today, the euro is the official currency of 19 of the 27 European member states. The currency is issued by the European Central Bank (ECB). Trailing only the dollar, the euro is one of the most widely traded currencies in the world. It is the second most used currency as a reserve currency and it is the second most traded currency in the world, again trailing only the US dollar.
In addition to being the official currency of European institutions, the euro is also used by 4 microstates that are not members of the European Union as well as Montenegro and Kosovo. There are currently more than 1.3 trillion euros in circulation making it the most circulated currency in the world.
Readers of this piece might recall in 2009 when the euro faced a major crisis. On the heels of the US financial crisis of the previous year, the eurozone faced a similarly stark problem. In the European Union, it was fears of a sovereign debt crisis that plunged the continent into crisis. Greece was in the direst situation, however, half a dozen other member countries also suffered great economic losses.
The crisis came to a head when Standard and Poor downgraded the credit rating of the European Financial Stability Facility, shortly after they had downgraded the credit of 9 member states.
Jumping ahead a decade, before 2020, experts predicted that the euro would continue to strengthen against the US dollar. In 2018 and 2019, anchored by Germany and France, growth in the region was strong which led to a fortified euro. However, due to the coronavirus pandemic and impending global economic recession, the Euro has slipped a bit recently.
Like most other currencies, the Eurozone seems headed towards a recession in the wake of the coronavirus pandemic. The eurozone economy shrank with negative growth occurring in 2020. The forecast for 2022 is brighter but it is still predicated as a very slow and mild recovery. The impact has also differed from country to country. Germany and Italy are expected to be impacted more than other countries.
Another effect of the pandemic is that inflation will likely be volatile. At the moment, there is some cooperation between the member countries but it is ultimately up to national governments to determine how best to alleviate the vast economic destruction.
If the pandemic is effectively controlled in the eurozone, the Euro has a chance to pick up strength. However, a continuing pandemic that leads to a further strain on public health systems will further weaken the Euro. The Euro also now has to compete with a strengthening US economy which is looking to roar back on to the global stage.
When countries had sharp increases in coronavirus cases, their currencies generally weakened. When countries made progress on containing the virus, those respective economies generally strengthened. This same logic held over the European economy.
However, before the pandemic, the euro was already weak against the US dollar. Countries like Italy had already been suffering economically before the first case of COVID was recognized. From that low point just before the start of the pandemic, the euro rallied and rose over 10% from March 2020 to August 2020. This rally was only stopped when a second wave of the virus was detected in the EU zone.
Since we are not out of the pandemic yet, it will take some time before we know the trajectory of the economy. Even if we were at the end, money markets could still take weeks or months to chart their course for the future. But as the eurozone has learned in recent history, it only takes one country to drag the rest of the block down. Recovery could be strong in a dozen countries but if it is a mess in Greece or Italy, it will weigh the entire currency and economy down.
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