Europe has many woes: a long economic funk, now worsened by Trump’s tariff war, compounded by a rising anti-incumbent populism that makes economic reform difficult. To that list can be added a strengthening euro.

Since the start of the year, the euro value vis-à-vis the dollar has risen by nearly 10%. Making matters worse for the European economy is that its currency is strengthening not just against the dollar, but against most currencies: up 3% against the pound, 6% against the Canadian and Australian dollars, and 9% against the Chinese yuan.

Given how trade-dependent the European economy is, with over half the revenues of companies in the Stoxx600 index coming from overseas sales, anything which makes its exports more expensive is going to depress profits and growth. Worse, because imports are getting cheaper, it will mean that other countries knocked backwards by Trump’s tariffs — and which are seeking new markets for their exports — will gain a further advantage over their European rivals. The continent’s fear of being swamped by cheap Chinese imports rises with each tick upwards in the euro’s strength.

It’s an unexpected problem. Normally, a tariff-hit economy should see its currency weaken, given the reduced demand from its export partner for its goods. But currency markets have not been acting normally of late. Instead of strengthening — as the dollar was expected to do, since US tariffs should depress American demand for the currencies of trading partners from which the country will now buy less — it has been weakening. Against a weighted basket of currencies, the greenback has lost nearly a tenth of its value since the start of the year.

This reflects rising doubts among global investors about the security of dollar assets, and the dollar as a safe haven. Given the mercurial behaviour of the American President, Europe has come to be seen as a more reliable and stable location for foreign investors looking for a safe haven to park their money.

Were Europe to create a single market for government paper through, for instance, common bond issuance, one could foresee the euro posing a serious challenge to the dollar reserve-currency status. That’s highly unlikely to happen, though, given how jealously European governments protect their own financial markets. Nevertheless, demand for euros looks set to remain strong unless a steady and predictable policy regime emerges from the US administration. Further adding to the demand for European assets is the recently announced massive expansion in German stimulus and defence spending, which has driven up demand for German government bonds.

Still, if a strengthening euro makes life more difficult for the continent’s exporters, there are a couple of silver linings to this cloud. To the extent the euro’s rise reflects the confidence of foreign investors in the continent, it may augur well for future investment, strengthening the supply of capital Europe will need for its revival.

It will also make it less expensive for European firms to invest abroad. For example, given that one way the German car industry may revitalise itself is through strengthening partnerships with Chinese firms, which are well ahead in EV technology, European firms seeking to move abroad will benefit from the reduced cost of investing there.

Finally, there’s some consolation in the fact that if things are bad in Europe, they’re worse elsewhere — namely America, where economists increasingly expect the relatively fast-moving economy to slow so quickly it will sink into recession. Though Europe too is headed that way, at least its stimulus programme will soften the blow. Post-DOGE America may not be so lucky.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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