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Inside Investment: Currency disunion

With the euro hitting fresh record highs against the dollar, it must be tempting for European policymakers to crow. However, complacency could lead to crisis.


A decade ago you could not avoid the euro. Every conference organizer and bank was jumping on the events bandwagon in the run-up to the launch of the single currency on January 1 1999. However, as the single currency approaches its 10th year it is hard not to think that this fanfare was fully deserved. The single currency has not only survived, it has prospered. With the euro climbing to new records against the US dollar on an almost daily basis there are doubtless plenty of smug central bankers in Frankfurt.

However, in spite of its apparent success, the euro looks more vulnerable now than at any time since its creation. The reason is the diverging fortunes of the Europe’s economies. Germany runs the world’s largest current account surplus in absolute terms, at $286 billion, or more than 5% of its GDP. Spain runs the world’s second-biggest current account deficit, $161 billion, or 9% of GDP. Global imbalances have been debated ad nauseam in recent years. European imbalances could soon rise up the agenda.

This diverging economic performance of the eurozone’s biggest and fourth-ranked economies is the clearest symptom of the problem.

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