NCPA - National Center for Policy Analysis

Why Is The Euro So Weak And What's Ahead For It?

December 7, 2000

When the euro made its debut, it was worth around $1.17. Recently, after repeated interventions by the European Central Bank, it was down to 86 cents.

Why?

  • The U.S. has been deregulating and freeing up its economy for the past 25 years -- which has enhanced the rate of return on capital here and attracted investments from Europe and elsewhere.
  • The rate of return on capital in the U.S. has been higher than in Europe's welfare states for a long time, according to research by Anthony Norfield at the ABN AMRO Bank in London.
  • The gap between U.S. and European returns has widened from 2.1 percent in 1998 to 2.6 percent today.
  • What's happened to the euro is similar to what has been happening to the Canadian dollar for years -- both are "undervalued" because both regions must pay for bloated welfare states.

What does the future hold? Euro boosters are taking some comfort from the expected slowdown in the U.S. economy and a resulting lowering of profitability of American companies. But these should be short-term phenomena. And a slowdown is underway in Europe, too.

Beyond the short-term, the euro will continue its weak performance vis-à-vis the dollar until European nations curb their free-spending ways and jettison government obstacles to business efficiency.

American businesses still labor under some of those burdens. But not to the extent their European cousins do.

Source: Steve H. Hanke (Johns Hopkins University), "The Euro's Rebound?" Forbes, December 11, 2000.

 

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