Global Impacts if EU Currency Falls

The recent years held lots of challenges to the European Unioin, as several European countries had their share of financial problems, despite the union’s strategy to contain the damages; challenges are still in the horizon. There had been major financial troubles in many European countries; banking troubles at Deutsche Bank, Credit Suisse Group, and virtually every major Italian financial institution. Greece had experienced a debt crisis and suffered economically as a result. Adding to it of course the major event in 2016 when the United Kingdom voted to leave the EU with the Brexit vote, although Britain isn't part of the euro currency since the British pound is still used. However, ever since the beginning of the long voting procedure there were lots of concerns surrounding trade deals with the European Union member-states. Throughout the troubled years, the EU economy responded fairly well, but this never erased the challenges imposed on the euro-based countries.

EU 2020 Recession

The European economy witnessed an expansion by roughly 2-3% on a year-to-year basis from 2014 to 2019 according to Eurostat, the European Union's statistics agency, and as measured by gross domestic product (GDP). GDP represents the total output of goods and services produced by an economy. The year 2017 was one of success and refreshment to the Eurozone after emerging from the debt crisis, and many countries becoming stronger and recording lower unemployment rates after the great recession of 2008. This upswing didn’t last long though, as the emerging coronavirus pandemic severely impacted the eurozone's economy, causing a new 2020 recession. As a result, the GDP growth rate declined by approximately 12% in the second quarter of 2020, while unemployment rose to 7.8% as of June 2020.

Global Side Effects

The so-called “Schengen Area” named after the 1995 Schengen Agreement could be under threat if the euro collapses. If Schengen were to fall, countries inside the eurozone would need to implement border controls, checkpoints, and other internal regulations previously eliminated in the Schengen Agreement. The costs of this would spill over into private businesses, particularly those relying on continental transportation or tourism. This will affect more countries than those in Europe, although in uncertain ways. Other regions, particularly major trading partners in North America and Asia, would face financial and possibly political consequences. The euro fall effect will reach countries outside the EU, as many of the supposed economic benefits inside the EU do not transfer to external trading partners. The freedoms of labor and capital do not extend to other continents (America or China) unless foreign consumers and producers gain access to a member country. As a result, it can be difficult to predict the potential fallout since it is possible that even stronger pro-growth policies could replace the bureaucratic super-state seated in Brussels. On the other hand, increased economic isolationism from nationalist movements could threaten international businesses and financial markets. A scenario of switching back to the local currency is also open in case of fall of euro. Redenomination “the official term for leaving the euro and installing an old currency” would entail two broad changes. The first is the official adoption of a new currency within one nation’s boundaries. This means adjusting present wages, prices, and other values to the new money on an approximately proportionate basis. Second, the international value of the currency would need to be priced into the foreign exchange (forex) markets. This is based on the productive capacity of each national government and the relative risk of a devalued currency. Finally, the impact on banking and international trade will also be visible; the eurozone was originally sold, in part, by the concept of creating a European counterpart to the U.S. Federal Reserve. Eliminating the euro would decentralize monetary authority back to the member nations. Banks could recapitalize in their national currencies although they would likely have to keep more active foreign exchange balances for regional trade and reconciliation. The various exchange rates would change the relative values of some assets held internationally, and the workers in less-inflationary European job markets would see a relative income boost compared to European governments with loose monetary policy. This brief on the possible scenarios if the euro falls shows it is unlikely for other economic policies to remain unchanged, even politically speaking; nationalistic parties could take action implementing new fiscal policies, that could change things massively even for a short period of time.   You might also be interested in: What is ADX Indicator?