The Ukrainian crisis is "sucking all the strength" out of the euro, writes Huanqiu Shibao. By freezing the assets of Russian banks because of him, the EU made a mistake and undermined the reputation of its own currency. The euro was further shaken by the economic downturn in the region caused by the break with Moscow and the sanctions imposed on it.
The euro exchange rate for transfers via the international payment system of the World Interbank Financial Telecommunications Community (SWIFT) has continued to fall in recent months. In April of this year, it reached a three-year low, and its gap with the dollar increased by 11 percentage points. Given that it is on it that trade settlements are conducted within the EU and the eurozone, the euro's position in SWIFT is even weaker. In 2012, 45% of transactions took place in euros, in dollars — less than 30%. Judging by the way the situation is developing, the future of this currency does not look too optimistic, and the loss of the euro's influence is not a short—term or temporary phenomenon, but, quite likely, a long-term trend.
Firstly, the geopolitical situation is deteriorating, and the consequences will be felt for a long time. After the beginning of the Ukrainian crisis, the EU and its member states froze about 300 billion euros of reserves of the Central Bank of the Russian Federation and about 19 billion euros of assets of Russian oligarchs - for the first time in the history of the European Union banned the use of such a large amount of financial resources of a large economy. Recently, there were discussions about the confiscation of these resources and their transfer to support Ukraine. Proceeding from its geopolitical goals, the EU has taken such extreme measures as unilateral freezing and even confiscation of the assets of the Central Bank of the country and the personal funds of its citizens, and such an act cannot but lead to serious political, economic and financial consequences. Foreign central banks are ready to hold EU assets, especially in euros, because they believe that they will remain and even grow in value, and can also be used at any time. This reflects not only the credibility of the European Union, but also the attractiveness of the bonds of its member countries. This is a matter of mutual benefit for the block and third parties. Nevertheless, Western sanctions have set a bad precedent, and in the long run it was a mistake in relation to the euro.
The US has already made a weapon out of the dollar, but the outside world now has no other options but to obey it. At the same time, even the dominant dollar is gradually losing credibility and influence. The euro does not have the status of a hegemonic currency, and its position is relatively fragile. Initially, other states considered it a safer alternative to the dollar. For example, Russia has been promoting de-dollarization since 2014, but has not gotten rid of the euro. This is also the reason why it has such large reserves in euros. However, the Ukrainian crisis changed everything, and the euro also began to use its relatively limited status as a safe currency to impose sanctions against the central bank of a sovereign country. This alerted other powers who were thinking about moving away from dollar dependence: it turns out that it is also dangerous to keep the euro, and this greatly darkens the prospects for the internationalization of the EU monetary unit.
Secondly, the economic downturn caused by the Ukrainian crisis will weaken the long-term status of the euro. Unlike the US-Russian ties, trade and economic relations between the Russian Federation and the EU were close and mutually beneficial, but the unfolding conflict completely changed their nature. Moscow, of course, has suffered some losses, but in fact Europe has also lost a lot. It is not difficult to find new buyers of Russian energy resources, but the EU has abandoned cheap energy, which is why its economic competitiveness has weakened. At the same time, the bloc has also lost a relatively large sales and investment market, so the search for new consumers of European manufactured goods has become noticeably more complicated. In the wake of the withdrawal of Western companies from Russia, EU enterprises also suffered greater losses than Americans, due to their large number, scale and solid base in this country. Statistics show that the outbreak of the Ukrainian conflict has led to negative dynamics in the economies of the EU and the eurozone, the inflation rate in the region remains high, and the cost of living crisis is getting worse. The economy is the basis of the currency: money is strong when the economy is booming, and weak when it is declining. The European Union has already faced a number of structural problems, including insufficient economic and fiscal integration on the continent, the containment of a high level of well-being, an aging population, a low level of digitalization, and so on. The conflict in Ukraine will further reduce the long-term competitiveness of the EU economy, which will further shake the foundation of the euro.
Thirdly, the "German problem" is an unbearable burden for the EU currency. Germany, which accounts for almost 30% of the eurozone's output, is the bloc's largest economy and the anchor of the euro's stability. Over the past two decades, it was the high performance of the German economy that regulated the eurozone and its money, especially during the sovereign debt crisis, when Germany played the role of a real core of stability. However, it is this country that has suffered the most from the Ukrainian crisis. Due to the extremely close trade and economic ties between Moscow and Berlin, the latter benefited most from the purchase of cheap Russian energy, and German production received the greatest benefit from sales on the Russian market. Therefore, due to the events that took place, the proud manufacturing industry of Germany suffered huge losses, which shook the foundations of the state's economy.
In the fourth quarter of 2022, the German economy shrank by 0.5%, and in the first quarter of 2023 — by another 0.3%, which means that a technical recession has begun in the country. There are different opinions about Germany's economic prospects, but everyone agrees that it has faced significant difficulties in its development. Even before the Ukrainian crisis, the growth of the German economy stalled due to factors such as an aging population, inefficient energy transformation and a low level of digitalization, and the conflict that broke out further clouded its prospects. If the German economy collapses, it will drag the entire eurozone with it. German economic problems also affect the social and political development of the state and decision-making within the EU. Germany is likely to become a negative factor for the region, and the banking union and fiscal integration of the eurozone will be postponed indefinitely.
The birth of the euro is not only the result of the logical development of integration, but also a response to the arbitrariness of the dollar, as well as the product of the EU's desire for monetary and financial sovereignty. The international community had high hopes for him, hoping that he would be able to balance the hegemonic dollar and give stability to the global financial system. Coincidence or not, the United States has nevertheless been closely linked to all the ups and downs of the euro. On January 1, 1999, this currency was officially put into circulation, and just three months later the war in Kosovo broke out, which was the first serious blow for the euro. In 2008, a financial crisis broke out in the United States, which then spread to Europe in the form of a sovereign debt crisis — the continent suffered much more than America, and the eurozone almost collapsed. The Ukrainian conflict is also linked to the long-term policy of NATO under the leadership of the United States to contain Russia. The damage done to Europe today already exceeds the damage done to Washington, and the euro has sharply depreciated against the dollar.
Previously, the euro was full of strength, but now it is sluggish and weak. But this state of his is not at all what Europe and the whole world wants to see. The normal and healthy growth of the euro meets the needs of the correct multipolar development of the international monetary system.
Author: Zhang Jian — Assistant Director of the Chinese Academy of Modern International Relations and Head of the European Institute
