Forex Investment and Currency Trading

On all reasonable measures, the euro has been an outstanding success. Upon its 10-year anniversary, the ECB can celebrate a remarkable record. While the ECB has kept home-grown inflation tightly under control, the region has enjoyed a major rise in employment amid a series of structural reforms. New challenges are ahead. But the record suggests that the Eurozone can cope with these new challenges as well.

As the European Central Bank celebrates its 10-year anniversary on June 1, the bankers as well as the politicians who founded the ECB can look back at a remarkable decade. By any reasonable measure, the history of the euro has been an almost unqualified success. Comparing the latest available data to the situation at the end of 1998, that is just ahead of the formal introduction of the common currency, we find the following:

• Consumer prices have risen by a total of 23%, equivalent to an average annual inflation rate of 2.25%. The ECB has fallen slightly short of its promise to deliver price stability, that is to keep inflation below 2%.
• However, if we strip out energy and food, core inflation has averaged 1.65%. Those prices on which the ECB has a discernible influence, that is those which are set by the balance of domestic demand and supply, have thus moved fully in line with the ECB target. Arguably, the ECB has done exactly the right thing. The ECB has not tried to squeeze domestic demand so aggressively that a weaker economic performance would keep headline inflation below 2% in the face of a major surge in energy prices.
• Real GDP in the Eurozone has risen at an average rate of 2.2%, slightly above our 2.0% estimate of trend growth.
• Since the end of 1998, the Eurozone has created an additional 16.1 million jobs, a rise in employment by a staggering 12.5%. Unemployment has fallen from a rate of 9.8% to 7.1%.
• The real gross disposable income of households has advanced by 16.3%, equivalent to an annual gain of 1.64%.
• The effective exchange rate of the euro has risen by 21% in nominal terms against a broad group and by 12.5% against a smaller group of – more stable – partner countries.
• The public sector has successfully downsized itself, with the share of public spending in GDP falling from 48.5% in 1998 to an estimated 46.1% in 2008 according to OECD data.
• As a result, the Eurozone could cut its fiscal deficit from 2.3% to 0.7% of GDP.
• Fiscal restrain also left room to cut the tax burden from 46.3% to an estimated 45.3% of GDP, measured as the share of general government tax and non-tax receipts in GDP.

In a rather bumpy process, the Eurozone countries have delivered a series of structural reforms. The region has also mastered with flying colours one of the gravest possible tests of its internal coherence, namely a wrenching 4-year adjustment crisis in its biggest and probably most euro-sceptic member, namely Germany. The subsequent German turnaround, from the “sick man of Europe” (the label we coined in 1998) to the Phoenix of the continent now, shows that countries can successfully reform themselves within the strictures of monetary union.

While the Eurozone downsized its overblown government sector, the share of government spending in GDP rose from 40.0% to an estimated 44.8% in Britain and from 34.7% to an estimated 37.6% in the US. Also, the 12.5% gain in Eurozone employment beats the US (8.2%) and the UK (9.4%) by a wide margin.

So far, all predictions that monetary union would be a disaster, that the Eurozone would inevitably head for ever more trouble and may even break apart, have been wrong. There are new challenges ahead, not least how to cope with persistently weak growth in Italy, a sharp housing market correction in Spain and an oil-induced period of semi-stagflation ahead. But the record of the last 10 years suggests that the Eurozone can master these challenges as well.