Index
1. Evolution of euro
2. Why the euro is devalued?
3. Revaluation of the dollar and lower oil prices
4. Expectation of increased interest rates in the US
5. International reserves in the future
6. Conclusion
In early 2015 the euro has been losing value against
the dollar steadily, which opens a series of questions about the future of the
world economy.
1. Evolution of
euro
The euro was adopted as a common currency in Western
Europe in 1999 but began his formal circulation as currency and banknotes in 2002.
By January 2002, the value of euro against dollar was 0.85 euro per dollar. The
euro was revalued progressively and reached its peak against the dollar on July
3 2008, when it traded at $ 1.58 per euro. Thereafter, in a process of ups and
downs the euro began a gentle process of falling against the dollar. For April
24, 2014 was trading at $ 1.38 per euro to arrive on December 29, 2014 to $
1.21 per euro. Thereafter, i.e., in the first months of 2015, the euro began a
significant decline reaching on April 23, 2015 at $ 1.07 per euro.
Official figures from the European Central Bank show
the reality before commented:
2. Why the euro is devalued?
We could not speak of a single cause but a combination
of several causes. I think the most important is the weakening of export
capacity of the countries of the European Union, especially Germany and France,
as a result, among other reasons, from the high value of the euro.
Merchandise exports from France are presenting a
slowdown since 2012 when they accounted for 21.17% of GDP; in 2013 accounted
for 20.65% while in 2014 fell to 20.46%.
German exports have also declined since they
represented 39.77% of GDP in 2012, 38.99% in 2013 and 39.08% in 2014.
Germany and France are that who actually dominate the
European Central Bank and is in the interest of both countries to improve their
position in international trade through the promotion of exports to emerging
markets, where they face strong competition from China especially.
The other problem for Germany and France is the
serious crisis that the countries of southern Europe and Ireland suffer, called
contemptuously? PIIGS for its acronym in English: Portugal, Italy, Ireland,
Greece and Spain. The imposition of austerity to these countries has created an
economic chaos that has to Europe at the gates of deflation. Unemployment
levels reach extraordinary figures and reduced wages, pensions and benefits in
health, education and other public services have sparked extreme poverty in
these countries. In a scenery like this, it is obvious that these countries
cannot maintain their consumption and imports of goods from Germany and France.
The consequence for these two countries is that the European market closes each
day for them due to weak purchasing power in other European countries.
In middle of the scenery described above, the European
Central Bank left with no other choice but to adjust the policy of austerity
imposed on European nations and has developed a liquidity program, known as
"Quantitative Easing,” which contribute to economic recovery. This program
highlights the failure of the austerity policy of the European Central Bank.
According to Orthodox criteria, issuing more money
without increased support from international reserves is not only an
inflationary factor but involves, in fact, a devaluation of the currency. If
this criterion is accepted as valid, it should be accepted then that increased
liquidity by the European Central Bank would be one of the factors contributing
to the devaluation of the euro.
At the previous mentioned factors we must add another new
reality: the emergence of an economic bloc, called BRICS, Brazil, Russia,
India, China and South Africa that will undoubtedly create a new global
situation, because it brings together not only the most populous countries in
the world China and India, but also other giants like Russia, the
geographically largest nation in the world, with border in Europe and in the
Pacific and Brazil, the largest country in Latin America. This group could be
expanded in the future with countries like Argentina, which obviously would increase
the BRICS influence globally. One consequence of strengthening and expanding the
BRICS could be the creation of a third international currency that in the long
term could try to compete with the dollar and the euro.
It should also be emphasized that economic differences
between countries tend to worsen due to political reasons. In recent years we
have seen resurgence conflict between the US and Russia, events reminiscent of
the Cold War. The points of friction are everyday more intense, as the problem
of Ukraine, Iran's nuclear program and the situation in other countries in
Africa and the Middle East.
Other controversial factors as the status of the most
important natural resources such as water and conventional oil, whose
availability is increasingly restricted, are present currently in the world.
The United States has found a way to solve its internal energy problem
developing a new form of production, fracking, but this technology does not
seem to be a lasting solution due to severe ecological damage, especially
damage to water supplies. Gold, used as an instrument of international reserves
by central banks of countries is also cause for concern. Germany recently
demanded the US return part of its gold reserves remaining deposited there.
Specialists in the field also report the efforts of China to treasure as much
of this precious metal, which, theoretically, would have an effect on the back
of its currency, the Yuan. Nevertheless, so far, China has not been able to
position its currency as an international source of reserve for the world
central banks. Japan, however, has so far succeeded in placing its currency,
the yen, as an additional source of international reserves, as evidence the
fact that the European Central Bank holds its foreign reserves in dollars, yen,
gold and IMF papers.
3. Revaluation of dollar and
lower oil prices
In July 2008, just before the global financial crisis,
oil prices reached a record high of $ 133.93 a barrel.
To break the upward trend in oil prices that
represented a real threat for the global economic structure, international economic
power factors accelerated the financial crisis of 2008. Indeed, since that
time, oil prices began to decline gradually to stand at around $ 50 for the
first months of 2015.
It is necessary to highlight that when oil hit its
record of $ 133.93 figure for July 2008, the value of the euro against the
dollar also reached its record high of $ 1.58 per euro, the most since the
creation of the euro in 2002. Consequently, we can interpret that as oil prices
peaked to $ 133.93 a barrel, the devaluation of the dollar against the euro
also peaked to trade at $ 1.58 per euro. Whereas now, in early 2015, when the
oil has reached its lowest level in recent years -around $ 50 per barrel- the
opposite phenomenon has occurred, i.e., the dollar has reached its highest
level of revaluation against the euro to $ 1.05 per euro on April 23, 2015.
How these phenomena can be explained? What is the
relationship between oil prices and the strength or depreciation of the dollar
against the euro?
The dollar is the international currency of commerce
and all commodities are traded in dollars; so their appreciation or
depreciation has a direct impact on prices of raw materials and the price of
all other goods and services that are traded globally.
4. Expectation of increased
interest rates in the US
This is another important fact in the current
international financial scenery, because of the impact it could have on the
appreciation or depreciation of global currencies.
An increase in interest rates in the United States,
would attract towards that country an important flow of financial resources
from emerging countries, always in search of more attractive remuneration but,
in turn, could lead to the devaluation of the currencies of those countries due
to the reduction of its dollar reserves.
5. International reserves in
the future
The environmental crisis and overexploitation of
natural resources like water and oil are already creating a new global reality
in which these resources have every day a greater value. As a consequence of
that reality a new interpretation of the concept of value will be imposed in
the medium and long term in the world, interpretation in which the value of
use, the usefulness will be the most important.
Water, until now abundant, has already become to be scarce
in countries like the United States, where one of their most important states,
California, is already beginning to suffer the consequences of drought. Other
states in the west and south are on the same path.
Conventional oil undergoes similar despite efforts
developed by the technology. So then, natural resources as inputs and food as
the final product of these inputs will constitute the large reserves of value of
the present and future. The wealth of the future will not be measured for possession
of money but for the possession of natural resources.
In the future, the international reserves of central
banks will not be formed only by currency (dollars), gold and papers of the
IMF. The international reserves of the future should be supported by the
tangible monetary values represented for water, oil and food. The reason is
very simple: because the dollar and gold no longer represent a sufficient
source of value in a world characterized by the crisis of the environment where
the natural resources every day are more and more scarce.
6. Conclusion
- The devaluation of the euro highlights the failure
of the austerity policy of the European Central Bank.
- The creation of the euro generated the illusion of a
new currency that would compete with the dollar, but so far, none currency has
been able to compete significantly with the US currency in which are still
carried most of the financial transactions and international trade.
- Considering the historical reality so far, it could
be inferred that the creation of a new international currency by the BRICS
could also suffer the same fate of the euro.
- The devaluation shows that the strong euro is an
illusion; devaluation may still intensify and return to the levels of 2002 when
it traded at 0.85 euro per dollar, i.e., the dollar remains the leading world
currency.
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