For the last three months, the European Commission has waged a “systemic failure” over their failure to control the rise of the Euro. The European Monetary System is meant to control the “output” of the Euro but it’s unable to do so due to the “output-lock” problem.
In other words, it can’t cause inflation or devalue the Euro (its unit of account) in the long term. The fact that its not under the control of the ECB has lead many to believe that its “price action” is not “spontaneous”. This was the most recent argument used by Fed officials in explaining why the U.S. does not need to raise interest rates.
It seems to me that there is a reason for the rising Euro and its increasing price. Below I will share with you a possible explanation.
The reason that the Euro is now rising is that it is already undervalued. I explained this in detail in a previous article, but the short version is that the ECB is operating beyond its capacity. That is, it is well below the level of productivity that would be needed to influence the price of the Euro.
A “productivity-shock” occurs when the employment demand exceeds the supply of workers in a country. As an explanation of this concept, imagine that your employer had suddenly slashed your hours by a factor of eight and now you are starting to have trouble paying the rent.
Your local hotel where you used to get all of your work done may be struggling. You will feel pinched because you’ve invested money in the place. However, the efficiency of the place doesn’t change at all because there are still eight people there.
However, when the national employment index drops, that’s when the economy recovers. The same applies to the Euro.
The European Union’s excessive banking restrictions were intended to control the flow of credit into and out of the Eurozone. It’s also true that their application tends to limit the overall supply of credit.
In addition, the very low exchange rate of the Euro means that its goods and services are priced “at the exchange rate of labor. It’s a very high rate of inflation but is actually deflation. And the reason it is not being controlled is that its relatively small economic unit is almost impossible to control.
In short, the Euro’s price rise is the result of an existing problem. Its value is determined by the relative productivity of the Euro area. If its productivity falls below what would be required to affect the Euro’s exchange rate, the Euro will rise.
In other words, the Euro is currently too overvalued. This is part of why it is still rising despite the rising Euro exchange rate.
Indeed, I hope you will please consider all this and think on it. Please consider all this and think on it.