Once regarded as the new, state-of-the-art fuel for the engine of global capitalism, the decline of the euro continued this week as its value dropped to a 12-year low of $1.06. Economists and analysts worldwide, including Dean Poppelwell of Forbes, predict that the European currency will continue to fall in the coming weeks and months, eventually reaching a point of parity with the U.S. dollar in the near future.
To many news-watchers around the world, the ongoing financial crisis in Greece is generally regarded as the driving force behind the decline of the euro. But other pressing issues factor prominently into the matter. In a article for the Guardian, Larry Elliott cited the major causes behind the euro’s decreasing rate of exchange as: the likelihood of an increase in US interest rates; the deepening crisis in Greece; and the effect of the European Central Bank’s newly-launched “quantitative easing” program, a plan devised by the ECB to stimulate economic growth.
Indeed, the pace of the decline of the euro — falling 24 percent over the past year, according to the Wall Street Journal — appears to have hastened since the ECB’s implementation of quantitative easing, a process which is commonly referred to as QE. The Economist recently listed the key concepts behind QE in an article entitled “What is Quantitative Easing?”
“To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before,” the Economist piece explains. “The new money swells the size of bank reserves in the economy by the quantity of assets purchased — hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans.”
Roger Hallum of J.P. Morgan Asset Management told the Wall Street Journal that the ensuing outflow of cash from the eurozone is a direct result of the ECB’s QE efforts.
“Eurozone domestic investors are looking abroad for higher returns and higher yields,” Hallum explained. “With various negative factors at play, we see scope for further declines [in the euro].”
It’s always a possibility that unforeseen political crises may emerge that will further exacerbate the euro’s spiraling demise. Military conflicts, commodity shortages, or the sudden exit of one or more countries from the eurozone are but a few possible scenarios that would drastically affect currency values not just in the EU but for the entire global economic system. But as governments, financial institutions, and high-volume investors jockey for an advantage in the midst of decline of the euro, it’s the rank-and-file consumers of Europe who will surely endure the harshest realities of a struggling economy.
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