Euro Crisis

Europe is still in the midst of a financial crisis, which shakes the euro to its foundations. European leaders have taken steps to save the euro, but are they sufficient en what are the implications? Tilburg University researchers participate in finding the best solutions.

Europe to the world: the euro is our currency but your problem

In 1971 John Connally, having just been installed as the US Treasury Secretary, received a European delegation that was in an uproar. The exchange rate of the US dollar was fluctuating wildly, causing uncertainty and economic problems in Europe. Connally told the baffled Europeans: "The dollar is our currency but your problem." They returned home empty-handed. Fast forward to 2011 and we discover something remarkable.

Take Latin America. The region is doing well. But this does not mean that Brazil and its neighbors are immune to major economic and financial problems in Europe. Spain, Portugal and Italy – precisely those euro countries with the biggest problems and the longest road to recovery – are among the main stakeholders in the region with hundreds of billions of euros in investments.
Nobody knows exactly how many additional jobs and how much economic growth this has produced in Latin America, but everyone knows that the impact has been significant. If the problems in the eurozone countries intensify and investments are cut, Latin America will surely feel the effects.

Europe is a crucial export market for Latin America. Problems here in Europe will result in a drop in consumption, with nearly immediate repercussions for the order books of Latin American companies.

Latin America is rich in all kinds of raw materials that the rest of the world needs. If the dollar is weak, commodity prices tend to rise. If the dollar is strong, the opposite is the case. Given the considerable – and growing – problems in the eurozone and the current discussions about the viability of the currency, it doesn't take rocket science to know the euro/dollar exchange rate can eventually only slide in one direction: down. The US has enough problems of its own, but at least the viability of the dollar is not at stake.

Speaking of commodities exporters, Canada and Australia are in the same boat. And the US should be worrying, too. The troubles that struck many US banks in 2008 caused considerable disturbances among their European competitors. But it's a two-way street. New problems at European banks, arising for example if they must write off massive loans to some euro countries and companies and consumers in countries like Spain and Italy, will hit the US financial giants, too, and they are currently not too sturdy to begin with.

In this context, it is not surprising that the International Monetary Fund has made more than 200 billion euros available in case emergency loans are needed in the eurozone and that China has recently invested several billions in bonds issued by the weak euro countries. China, India, rich Arab countries and the rest of the world know very well that now, 40 years later, the cards have been reshuffled so that the Europeans, like the Americans in the early 1970s, can say to the rest of the world: the euro is our currency but, at least in part, your problem, too.

Edin Mujagic is associated with Tilburg University as an external PhD student. He is the author of the book 'Het Inflatiespook' (The ghost of inflation) which was recently published. He has also written the forthcoming book 'De toekomst van de euro: keert de gulden terug?' (The future of the euro: will the guilder make a comeback?). More information about the book can be obtained by sending an email to edin@inflatiekomteraan.nl