Euro Depreciation

بسم الله الرحمن الرحيم

Political Observation - The Depreciation of the Euro

The slump of the European Union’s single currency has made the headlines of international financial magazines; the euro has fallen to less than one dollar, down from the rate of $1.20 a year ago. This is the lowest level in more than 20 years when the euro exchange rate against the dollar reached 0.82 cents in the autumn of 2000. Meanwhile, the US dollar exchange rate against other currencies has risen to its highest level since October 2002 to a record 108.6 on the US Dollar Index, benefiting from the rise in the interest rate undertaken by the US Federal Reserve, and from being a safe haven between currencies and capital flows resulting from the rise in the prices of energy, raw materials and agricultural products.

In order to perceive the reality of this decline, it would be imperative to understand the political reality the Eurozone is experiencing due to the war in Ukraine, the consequences of the sanctions it imposed on Russia, the mechanisms of currency exchange, and the process of determining the exchange rate and its fluctuations. It is known to those who follow financial and monetary policies that the exchange rate of the currency is affected by several factors, including the political situation of the country that owns the currency, such as its political decisions, the speed of its dealing with events, how it is affected by the security situation, and the indicators of foreign trade, as well as the consequent foreign cash transfers, the interest rate ceiling in the country that owns the currency compared to its counterparts, and the dollar’s magnetism for international investments as a safe haven in light of the security and military changes., Additionally, the exchange rate is also impacted by the fears of economic deterioration, and the decline towards economic stagnation due to the energy crisis and the turmoil of its markets, especially after the Russian decision to stop the supply of gas to Germany via Nord Stream 1 under the pretext of maintenance, knowing that it is the largest gas supply pipeline from Russia, as it transports annually about 55 billion cubic meters of gas to Germany. Russia’s move was described by French President Emmanuel Macron as using energy as a “weapon of war”, as Russia's shutdown of Nord Stream 1 threatens Germany's winter preparations amid fears of a permanent gas shutdown. BNP Bank explained to Reuters that the 4.5% fall in the euro-dollar exchange rate on 27 April 27 2022 was caused by Moscow's announcement that it would stop transporting gas to Poland and Bulgaria.

For the record, the US Federal Reserve raised the interest rate for the dollar as a hedge against an inflation flareup and signalled an expected third hike in September. Meanwhile, the European Central Bank faces the fears that the economy of member states will slide into recession in light of the economic and political facts that resulted from Russia’s invasion of Ukraine. This influenced the US Federal Reserve’s decision not to raise the interest rate ceiling, which in turn prompted a number of speculative monetary portfolios to switch from the euro to the dollar in search of higher returns following the rise in the interest rate in the United States.

In fact, the various paper currencies in circulation nowadays are different commodities traded in the global money markets, which “transact more than $6.6 trillion per day”, not for their own sake, but for their ability to purchase other commodities, or for being a safe haven in situations of financial and political turmoil. The value of the monies is estimated by the amount of their purchasing power; That is, the extent to which a person can obtain goods or services, or the amount of their moral power and the correlation of their assessment with the strength of the economy of the country that bears its name, such as the US dollar. 

Hence, the exchange rate is the result of supply and demand i.e. the need of one of the two parties for the currency that is in the hands of the other party), and this is often generated by the monetary relationship resulting from foreign trade or the imbalance of the accounts balances of countries because a country must pay the price of the goods in the currency of the country from which they are imported or in the currency it accepts. The value of trade and service exchanges between America and the Eurozone reached a trillion dollars in 2020, and the exchange of the two currencies is the most liquid and exchanged between global currencies.

On the other hand, the exchange rate is the outcome of a variation in the prices of goods in the country that has issued the currency, and if the price level in one country rises higher than in another due to an increase in money, for instance, the exchange rate must change between them; thus, the external value of the currency of the country in which the prices rose will decrease. And since the seven developed countries are suffering from the crisis of rising prices, their currencies are all subject to decline. However, America's monetary policy, which has turned the dollar into the first reserve currency in the world, representing more than 61% of the total hard currency reserves of the countries of the world, and since the exchange rate of all currencies is linked to it, in addition to being a tool covering the currencies whose price is determined in the light of the percentage of this coverage, as well as the correlation of the price of natural resources, especially oil and gold, with the dollar, is what generated the world’s need for the dollar and its use to pay for huge costly oil purchases as an indispensable commodity, in addition to the prices of foreign trade and loans granted in dollars; all this is in addition to feeding the central banks' reserves of the world's first currency, and the Federal Reserve's increase in the interest rate, which enabled the dollar to avoid the fall of its exchange rate.

When the euro was launched, some observers speculated that it might be able to compete with the dollar and undermine its centrality in the global financial system after the (euro) had become the currency of invoicing and trade exchange between member states for a collective economy equivalent to 16 trillion dollars, and a volume of international trade transactions equal to 15% of the global total, as It accounted for 23% of global reserves. However, the eurozone suffered several setbacks from which it did not recover, apart from Germany. The public debt crisis in Greece almost led to a financial collapse in the eurozone and resulted in the speculations of the US hedge portfolios in the debt crisis for both Spain, Portugal, Cyprus and Ireland, and a rise in the levels of government debt and unemployment rates.

However, the political conditions and the crises that America concocted during the past decade did not help the euro achieve a balanced level of competition with the dollar, especially the Russian-Ukrainian war, and the harnessing of the Covid pandemic and its economic fallouts, in addition to inflation. This may lead to economic stagnation in the eurozone in light of the narrow economic options before the EU member states, especially since addressing these issues is not brought about with purely economic solutions, but rather requires political decisions. The Ukrainian crisis, which angered Putin, and his targeting of the European economy in order to deepen the dispute between the EU countries and weaken their alliance with the US, is the best example of this narrative.

He means that the euro’s fall against the dollar does not reflect reality, as the economic fundamentals indicate that the current exchange rate does not represent the true value of the euro, which they estimate between 1.1 and 11.1 dollars per euro, according to analysts. The fact is that investment portfolio managers hedge against the consequences of political crises and the failure of the European political decision-making, one of the most prominent factors that led to the exodus of capital from the euro to the dollar, through those operations carried out by portfolio managers to stabilize the exchange rate to preserve the value of investments, which resulted in a decrease in the value of investments in the euro.

"Our analysis has shown that flows rather than fundamentals may have been the key driver behind the euro’s drop," a currency strategist at BNP Bank indicated during an interview with Reuters. He means the euro’s fall against the dollar does not reflect reality, as the basic economic indicators suggest that the current exchange rate does not represent the true value of the euro, which they estimate between 1.10 to 1.11 dollars per euro, according to analysts.

Therefore, ending the crisis of the euro’s decline depends on restoring market confidence by resuming gas supplies through Nord Stream-1 and maintaining uninterrupted supply, since the alternative to it is to continue buying gas from America and from areas under American influence in dollars, instead of buying it in euros from Russia; this would lead to an increase in the flow from the euro to the dollar, and thus, weakening the value of the euro; US gas shipments to Europe reached a record high, up 30% in the month of February alone and America is expected to account for 22% of total global LNG shipments. In the meantime, Europe's economic crisis will remain as long as the Europeans rely on America in facing European national security challenges and are unable to resolve issues related to Europe's interests, especially in the energy sector. Europe’s main security challenge is reflected in the sanctions imposed on Russia, which America dictated to the EU, and which have had a negative impact on the eurozone; it is also threatening to incite public opinion in Europe against the standpoints of European governments vis-à-vis the Ukrainian crises as a result of inflation and increase in prices.

As for the measures of the European Central Bank, which involved raising interest rates to meet the challenges of inflation and price hikes, and to contain popular discontent, after it had been hesitant about the amount of interest, due to the apprehensions towards its negative economic fallouts, such as reducing the funds in the market and the withering of the economic process in the capitalist system, as it relies on lending to stimulate investment in machinery, equipment and employment, such measures, although necessary, do not fundamentally tackle the European economic situation unless Europe becomes completely independent from America, and unless she rids herself of US influence on the decisions of the EU, at both economic and military levels.

We conclude from all of this that although the reasons for the decline of the euro are characteristically economic, their plane and causes are however purely political. This indicates the level of subordination of European leaders to American volition. It is not expected that Europe will emerge safe, economically and security-wise, unless her willpower, which is subject to Washington's dictates, is liberated. The global economy will not be upright and the peoples of the world will not be reassured about the global economy and financial system unless they return to the gold standard in the global financial system, and unless Islam is restored to the reality of life and the state that presents its civilisational model and its fair systems, and induces the countries of the world to adopt its principles, values and leadership to put an end to America’s hegemony over international decision-making.

24 Thil Hijjah 1443h               
23 July 2022