As stable as corporate profits in the eurozone have been so far, the macro situation could not be worse. The wait for the recession, a slump in corporate profits, is omnipresent. Expecting the worst and ideally being pleasantly surprised is the motto that you can currently gain a lot from.
Not only the asset prices as well as inflation and the key interest rate provide information about the situation. Thus, it is above all the euro-US dollar parity that serves as a yardstick of the eurozone situation. The result is devastating. A year ago, in July 2021, you got the equivalent of 1.20 US dollars for one euro. Now you only get a 1: 1 exchange ratio. In just a few months, confidence in the euro, the “second largest” currency after the US dollar, has been withdrawn.
Euro: how did the loss of confidence come about?
Of course, there is not one reason that affects exchange rates. However, the following points are likely to have had a greater impact on the weakness of the euro and the strength of the dollar:
- Europe is more dependent on Russian energy than the US, and the risk of escalation is correspondingly greater.
- The European Central Bank is more hesitant to react to rising inflation than the US Federal Reserve; generally lower key interest rate level, as the European economy is less resilient.
- The US can implement (political) measures more consistently than the eurozone community.
- Divergence between the euro members: It is becoming increasingly difficult to “reconcile” debt and economic performance or to reflect them by a common external value of the common currency.
- In times of great uncertainty, the world’s leading currency, the US dollar, benefits more than the euro.
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Foreign currency Euro
In addition to the points listed, however, there is another difficulty: the euro is a kind of foreign currency for the euro members themselves. Since the monopoly on money does not lie with the nation-state, but with the supranational institution ECB, Germany, Italy, France and Co. cannot simply print money when it needs some.
This is a special feature. Because normally a state cannot “go bankrupt” because it can instruct the central Bank indefinitely – supposed central bank independence or not – to print its own currency. However, the euro member countries do not have this privilege.
As long as the ECB keeps the interest rate level down and buys government bonds, especially Italian government bonds, this is not a problem. In this case, debt servicing does not pose a threat to the state budget, and fresh liquidity is provided. According to the ECB, this is exactly the end of it. Due to the high inflation, it would also like to refrain from buying up the bonds of the euro member states, while at the same time increasing the key interest rates.
European Central Bank: The Unresolved Dilemma
The question that is now in the room: what happens when highly indebted countries like Italy slip into recession and can no longer meet their debt service or service their expenses?
Basically, there are only two options: the ECB changes its course and buys government bonds again, or the corresponding country has to leave the monetary union, devalue and reintroduce its own currency. The very euro-specific problem is likely to contribute to the fact that the euro is as weak against the US dollar as it was shortly after its introduction.
Weak Euro vs. strong Euro: Which is better?
Now the objection may come that a weak euro helps the German export industry, since our manufactured goods become cheaper as a result and German companies can sell more as a result. This argument is not wrong per se, but it falls far too short.
On the one hand, we have to import a lot of goods, especially raw materials and semi-finished products. On the other hand, due to their complexity, our manufactured goods are less price-sensitive than simple products from emerging countries. Also, a not insignificant share of German exports goes to other countries of the eurozone, which also can not take advantage of it.
Instead, our consumption of imported goods is becoming more expensive in this country. After all, we receive fewer and fewer foreign goods for one euro, which have already become more expensive due to inflation and the supply chain. The new iPhone from Apple will be more expensive not only because of inflation, but also because we have to put more euros on the table when importing than a year ago. Consequently, both a strong and a weak euro have their advantages and disadvantages, which ensures that the dispute has always been heated.
It is important to note at this point that inflation and the euro exchange rate are two different pairs of shoes. Although the US has higher inflation than the eurozone, the US dollar is appreciating against most other currencies.
US dollars and Bitcoin: what does this mean for investors?
If it has always been annoying to convert between US dollars and euros, you can now be happy. A Bitcoin worth $22,000 is also worth $22,000 – handy. More important than this convenience, however, is the relative appreciation of American assets. Those who own assets denominated in US dollars can look forward to currency gains, vice versa.
For example, owners of stablecoins, which in most cases are based on the US dollar, can consider themselves lucky with their virtual foreign currency account. Also, a stronger US dollar leads to an increase in US stocks in the depot. Those with US equities can look forward to a currency-induced price increase of around 14 percent since the beginning of the year. The flip side is that this principle also works in the other direction.
So if you are not too optimistic about the future of the euro, you can benefit from moving to assets that are not denominated in euros. In theory, cryptocurrencies such as Bitcoin can also help to compensate for such euro currency losses.
