Euro at record high against dollar: Can we even afford the strong euro?

The euro has had a few spectacular months.

Since Donald Trump (79) took office, America is no longer considered a safe haven where investors from all over the world park their surplus funds. Given the turmoil in Washington, many international investors are no longer entirely comfortable with the US . Accordingly, Europe's currency has since appreciated 14 percent against the dollar.

The euro is the most obvious alternative as a global replacement currency. In this respect, the euro's strength would be only relative—a reflection of the dollar's weakness.

But that's only part of the story. The euro has also strengthened against the Japanese yen, the Australian dollar, and the Chinese yuan, as well as against the British pound, the Polish zloty, the Indian rupee, and the Turkish lira. On average, the euro is stronger than ever before: the "effective" exchange rate has reached an all-time high. It is almost 30 percent higher than at the beginning of monetary union 26 years ago. Europe's currency has strengthened not only relative to the dollar, but also in absolute terms.

One rubs one's eyes and wonders how this can be. While the economy in the Eurozone is barely growing, societies are rapidly aging, and government debt continues to rise at a high level , as the International Monetary Fund has just calculated again, the euro is getting stronger and stronger.

Three questions arise:

Are foreign exchange traders exaggerating – or are they simply recognizing developments earlier than other players?

Can we afford a strong euro – or will the appreciation completely strangle the economy?

And anyway: Why aren't we Europeans proud of the strength of our currency – just as the ever-stronger D-Mark was once a source of national self-assurance for West Germans?

But one thing at a time.

The financial markets are predicting a brighter future for Europe—and Germany in particular—than we ourselves believe. While surveys regarding the expectations of citizens and businesses, as well as the forecasts of economic researchers, continue to paint a rather bleak picture, international investors are clearly seeing a lot of hopeful blue skies. However, it's by no means clear whether this is real or an illusion.

So far, we're a country of untapped potential ( we talked about this recently ). This deplorable state can be perpetuated into the future—following the motto: it won't work anyway. Or we can emphasize the potential that, if tapped, could promote a rapid catch-up process.

The fact that the foreign exchange markets are more likely to recognize Europe's potential has primarily to do with Germany: Investors and analysts see the new fiscal policy, in which money is being spent on defense and infrastructure without shameful restraint, as an indication of real change. The details have apparently not yet been revealed, such as the fact that the government is continuing the employment-crippling social policies of recent decades – or that Germany does not offer favorable conditions for highly qualified immigrants, as surveys show.

But who knows, there may still be some positive developments in these areas.

At least the current leadership in Brussels, Frankfurt, Paris, and Berlin seems comparatively trustworthy: serious women and men who seem willing and able to make Europe stronger, more resilient, and more productive. Team vdLLMM (von der Leyen, Lagarde, Macron, Merz) stands in reassuring contrast to the ongoing drama in Washington.

While the Trump 2.0 administration celebrates attention-grabbing government chaos—including daily new twists in the trade war and threats against the central bank—relative reason reigns in Europe. Even if that all too often means waiting for a broad consensus and clarification of all risks—and ultimately standing still.

For more than a quarter of a century, Europe hasn't dared to make any major leaps forward. The result is a petrifying wait-and-see mentality across the economy and society. It's questionable whether this attitude can be broken. And if Team vdLLMM doesn't seize its window of opportunity and right-wing populists come to power in the core of the EU, not just in a few smaller Central and Eastern European countries, all hopes for a euro renaissance would be dashed.

But can we actually afford a strong euro?

First of all, the appreciation puts a strain on exports. Domestic goods and services are becoming more expensive relative to those in other countries, and rapidly so. For the sluggish Eurozone economy, which is dependent on foreign demand, a strengthening currency is initially inconvenient.

Worse still, the stronger euro is exacerbating the impact of the US tariff barrage. Trump has announced plans to impose a 30 percent tariff on EU imports starting in August.

Other countries that are expected to pay comparable tariffs are being helped by a parallel devaluation: The Canadian dollar and the Mexican peso have weakened against the dollar, which at least partially offsets the tariff on a US dollar basis. In contrast, the Eurozone, and especially export-heavy Germany, are being hit with a double whammy—tariff plus revaluation. That will hurt.

ECB Vice President Luis de Guindos recently stated that a dollar exchange rate above $1.20 would be problematic for Europe's economic development. The ECB leadership debated the consequences of the euro's strength intensively at its monetary policy meeting in early June, as the minutes of the meeting show .

However, the current currency movements can also be interpreted as a normalization of currency relations. The current exchange rate of 1.17 dollars per euro roughly corresponds to the average value of the past quarter century. The pace and breadth of the appreciation against a variety of currencies (see the effective exchange rate mentioned above) may be unpleasant.

But the strong euro also clearly brings advantages: Inflation has fallen back to the target of 2 percent thanks to cheaper imports. Interest rates are low. All of this helps private investors and cash-strapped governments with financing.

In the longer term, the strong euro could usher in a structural turnaround. Since the euro crisis in the early 2010s, the monetary union as a whole has been a surplus economy. We operate according to the formula: export a lot, invest little, and invest the surpluses abroad.

Unfortunately, there's no other way to say it, but since the sovereign debt crisis, the Eurozone has developed a perverse business model. This model was fueled by a weak euro. Exports helped to achieve or maintain price competitiveness. The downside, however, is problematic: a chronic lack of investment, which in the long run has stifled productivity and contributed to economic stagnation.

This isn't normal. Large surpluses should actually be offset by currency appreciation. This is something Germans have experienced repeatedly since the 1950s: The increasingly strong Deutsche Mark kept export surpluses in check and gradually raised citizens' living standards.

Accordingly, an increasingly strong euro could now contribute to increased investment in our country – thus increasing productivity and real incomes. However, this requires a whole series of accompanying reforms: a unified European capital market where growing, innovative companies can finance themselves; better conditions and more funding for education and research; completion of the EU internal market, and much more.

All these reforms are currently being hotly debated, but it is by no means certain that they will become reality.

Ultimately, there are no reasonable alternatives to further integration. The eurozone must create the conditions for surplus savings to be productively invested in our country. We need a business model that can cope with the new geoeconomic conditions. Large, independent capital markets and a strong euro are necessary building blocks of such an arrangement.

Finally, there remains the question of the significance of the currency's external value for our shared identity. Exchange rates are often an emotional issue because the price of one currency relative to another tells a story: It's about how powerful a country is. Whether or not a country—as a society, economy, or nation—can afford a strong currency. Appreciations are a source of national pride. Depreciations are often perceived as a sign of weakness.

Before the creation of the euro, Europe was pervaded by such debates. Devaluations within the European Monetary System (EMS), the exchange rate mechanism that preceded monetary union, were perceived as a national disgrace. When Italy and Great Britain were catapulted out of the EMS by the foreign exchange markets in 1992, this had serious domestic political repercussions.

Conversely, the Deutsche Mark was a rich source of national identity for West Germans. The phrase "Deutsche Mark patriotism" was circulating at the time. The "economic miracle" and the resulting ever-stronger German mark made the relative rise after the total moral and military defeat directly tangible for West German citizens, especially when traveling abroad. The West German economic nation formed around its economic success.

Can the strong euro contribute to a positive sense of European community? The European Union , in its implementation primarily a technocratic project characterized by all sorts of divergences, traditional national complexes, and international conflicts, could well use an overarching story: a positive, shared narrative that points to the future.

As Europeans, our best chance lies in asserting ourselves as a unit in the geoeconomic struggle. Under pressure from neo-imperial megapowers, we have little choice. It may sound rather pathetic, but we are a community of shared destiny.

If a strong, beautiful euro (as Trump would probably put it) could help strengthen our common identity, that would not be a disadvantage.

Monday

Brussels – Is Europe striking back? – Trump has announced that the US will impose tariffs of 30 percent on imports from the EU starting August 1. The EU, which had previously put planned countermeasures on hold, is now under pressure to act.

Berlin – What's next, Germany? – Presentation of the final report of the "Initiative for a Capable State." With: Steinmeier, Digital Minister Wildberger, and Kretschmann.

Beijing – Trump Effect – China's customs authorities present foreign trade figures for June. How much of an impact will the US tariffs have?

Tuesday

Beijing – Interim Report – China's National Bureau of Statistics publishes growth figures for the second quarter. The economy is suffering from overcapacity in industry and the construction sector.

Reporting Season I – Business figures from Ericsson, Bank of New York Mellon, JPMorgan Chase,

Wells Fargo, Citigroup, State Street.

Wednesday

Reporting season II – business figures from ASML, Richemont, Rio Tinto, Goldman Sachs, Morgan Stanley, Bank of America, Alcoa, Johnson & Johnson.

Thursday

Luxembourg – In detail – The EU statistics agency Eurostat publishes figures on price developments in June.

Reporting season III – business figures from Nordea Bank, Volvo Cars, Volvo, Novartis, ABB, Easyjet, US Bancorp, Pepsico, Netflix.

Friday

Reporting season IV – business figures from Saab, Electrolux, Vattenfall, Burberry, American Express, Schlumberger.