Why You Should Care About the Euro

Written December 16, 2011

With the European crises in the news daily, I get many questions from clients regarding the issues in that region.  One of the main questions is why there so much focus on the euro and is it important that it survives. 

Let’s first discuss why the euro was created.  Currency is all about purchasing power and stability. Before 1991, Europe had many currencies even though it was really a very dependent economic system.  This caused many inefficiencies and even more important, a disadvantage globally in exports.  If a country’s currency is too volatile it is a major disadvantage against more stabilized currencies like the Japanese Yen and the U.S. dollar pre 2008. 

In 1991 the European Union (EU) approved implementation of one currency instead of each country having their own.  The value of the Euro is much greater than any countries currency was independently.  The main, but not only, reason the Euro was created was so the European nations could better compete with the United States.  Sure a Euro helped travel among the European countries and eliminated potential currency wars in that region (a currency war is when countries deliberately devalue their currency so that their products are cheaper globally), but the ultimate goal was a more stable and stronger currency to compete globally.

There were many distractors and critics of one currency for all of Europe.  The primary reason is many believed that you could not have one currency without one political system.  You just have too many different priorities and belief systems to have one currency.

Which is where we find ourselves today, different priorities for the European nations, but all tied to one currency.  The critics appear to have been correct, but with dire consequences.

The question remains, can the Euro survive?  Not only can it survive, it must if we want to keep ourselves out of another major recession (if one believes we ever left the last one).  The end of the Euro means a banking crises in Europe possibly larger than the crisis here in the U.S. in 2008.  This crisis will most definitely have a rippling effect touching the entire globe, including the U.S.  Per James Capital Research, the U.S. exports about $400 billion in goods and services to Europe. Securities and business transactions amount to about $1 trillion more.  This is why the Euro is important to investors and why keeping the Euro intact is important to most everyone.  It means fewer jobs for the U.S., at least in the near-term, if the Euro fails.

Each country in the Euro most definitely knows this.  If a country returns to a national currency and removes the Euro, they will have crushing consequences to their economies.  If you were buying a currency, would you buy one that is backed by one nation, or a collection of nations?

There really is very little debate on whether or not to bail out Greece.  The main hold up is Greece committing to continue under the Euro instead of breaking off with their national currency.  Germany, the clout behind the bailout, will only approve of one if Greece commits to the Euro.  The grandstanding and politicking has moved into France as well.

In summary, if the Euro breaks up be prepared to make changes to your portfolio and brace yourself for possible hard times.  In previous articles I stated Greece (or any of the PIGS countries; Portugal, Italy, Greece, and Spain) going bankrupt or needing major bailouts, will not create significant impacts on our or the global economy.  The dismantling of the Euro is much more worrisome to me.