Euro – the economy is hardly slowing down, but it is giving the ECB some breathing space

The appreciation of the euro has recently fuelled discussion about potential negative consequences for the Eurozone’s economy. However, how critical is the last few months’ appreciation in actual fact? There’s no denying that the single European currency has shown strength since spring; the euro has increased around 12% on the U.S. dollar since the start of the year, which certainly seems to be raising well-founded concerns. However, viewed in terms of the broader spectrum of trade-weighted considerations, the appreciation seems to be significantly lower, which puts the potential damage to the economy into perspective. Furthermore, there are sound reasons for the stronger euro, not least improvements to the fundamental environment. This has brightened up noticeably over the past few months. Although at the beginning of 2017 the market expected economic growth of 1.4%, our current projection is 2.0%. To date it seems that the EMU economy has been largely unaffected by the recent strength of the euro. As long as appreciation does not continue with the same momentum it has had recently – and I do not expect it to – the stronger euro should hardly slow economic activity in the Eurozone.

The present level of the euro is certainly no reason for the ECB to worry. At most, the speed of appreciation might warrant a slightly concerned commentary. Overall, the stronger euro is firming up the monetary environment in the Eurozone. This, in turn, will enable the ECB to approach the possible exit from the current expansionary policy in a more relaxed manner.

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