9/26/11

The Euro at a Crossroads• The European Union

consists of the following countries.

The Euro at a Crossroads• Of the 27 members

of the EU, these 17 countries use the euro as their currency. These 17 countries make up what is called the “Euro Zone.”

The Euro at a Crossroads• The euro became

the common currency in the euro zone in 1995 and began worldwide circulation about a decade ago.

The Euro at a Crossroads• The worldwide

economic recession affected the euro around 2009. This chart shows the exchange rate between the euro and the dollar. Note the steep decline in 2009.

The Euro at a Crossroads• This chart shows the

euro vs. the Japanese yen. Once again, not the steep decline in 2009.

The Euro at a Crossroads• While the dollar and

the yen have had their own problems, here is a chart showing the exchange rate for the euro and the much more stable Swiss Franc. This much more clearly shows the struggles the euro is having.

The Euro at a Crossroads• A common currency

may ease some economic inefficiencies but it doesn’t overcome the underlying economics. The 17 Euro Zone countries have very different economies.

The Euro at a Crossroads• This chart shows the

Gross Domestic Product (GDP) for 2010 for the Euro Zone countries. Note the drastic differences in economic output across the 17 countries.

The Euro at a Crossroads• Furthermore, while

each country has a different level of economic output (GDP), each country incurs a national debt at a different rate. This is where the problems with the euro have emerged.

The Euro at a Crossroads• Five countries–Italy,

Spain, Greece, Portugal, and Ireland–have national debts that are close to or exceed 100% of economic output.

The Euro at a Crossroads• When a country’s

debt is so high, then it becomes more expensive for that country to borrow more money.

• BUT, since these countries all rely on the euro, it is the common currency that is affected.

The Euro at a Crossroads• Furthermore, unlike

the U.S.—which has its own debt problems—these Euro Zone countries cannot print more currency, since they do not “own” the currency.

The Euro at a Crossroads• The decline in the

value of Euro, while stemming from a handful of countries, is affecting the entire European economy.

The Euro at a Crossroads• The solution is to do

two, almost contradictory things: grow their economies and reduce their national debt.

The Euro at a Crossroads• Unless and until all

of the Euro Zone countries have stable and growing economies, the euro will continue to struggle.

The Euro at a Crossroads• In the extreme case

where a country default on its debt, then euro could cease being a common currency, at least for the defaulting country.

The Euro at a Crossroads• In 2010, the EU

created the European Financial Stability Facility (EFSF) to help shepherd the affected countries and the EU out of these financial difficulties.