What the government will do with old currency

The euro paradox : Why the EU currency is becoming more and more attractive for investors during the crisis

The euro is doing well in the corona crisis. For a year now, the common currency has gained 7.5 percent against the dollar. In May, the euro was still at $ 1.08; it is currently valued at over $ 1.19. The prices have really been on the up since the beginning of July.

Economists believe that, on the one hand, there is a dollar weakness behind this. The EU's medium-term growth prospects are higher than that of the US. The Europeans get through the first Corona phase better; and the rescue packages will help the local economy get out of the red faster.

Most experts are also convinced that there is another reason for the upward trend. The common currency received political support this summer, which it had to wait a long time for. Some, like ex-EU budget commissioner Günther Oettinger, even believe that the euro has the potential to break the dominance of the dollar. Of all things, the decision by the heads of state and government at the end of July to go into massive debt as a community of states for the first time should have given the common currency the accolade among institutional investors.

"At first sight it is paradoxical"

Markus Ferber (CSU), expert on economics and currency in the European Parliament, admits: "At first glance it is paradoxical: only now, when the EU is massively in debt, the common currency is really visible in the financial markets."

The heads of state and government had decided to raise 750 billion euros for the reconstruction of the financial markets. That is a huge sum - about three times as much as Italy, the country with the highest capital needs in the euro zone, has to borrow each year in order to have follow-up financing for the old debts. There is still no name for the new joint bonds in euros. "Corona bonds" or "Euro bonds" are politically burned as terms.

It is clear, however, that EU Commission President Ursula von der Leyen will soon have to go to roadshows for the new bonds in euros that will be issued from 2021 and rave about the advantages of this investment in front of pension funds and institutional investors. It is also clear that the new promissory notes in euros will meet with high demand from major investors around the world. Ferber: "The bond will have a top rating and an unprecedented volume, and it will also be tradable on secondary markets."

EU crisis policy creates trust

Uli Leuchtmann, currency analyst at Commerzbank, also believes that the decisions of the heads of state and government have changed the markets' view of the euro: “On the financial markets, you can see that the euro is not in a crisis during the Corona period The crisis management at the EU summit is rated as successful by the financial world: "The heads of state and government have given the euro a certain degree of crisis resilience by linking the bonds to the EU budget."

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This means that there can be no doubt whether the debts of Europe with a term until 2058 will also be repaid. For the EU budget, all 27 member states have to give guarantees according to their economic performance.

The dollar is still ahead

Even if a country left the EU, the guarantees would still apply. Leuchtmann: "This means that these bonds are considered to be low-risk." The impact of the bond is enormous. So far, each member state has issued government bonds on its own. If it is a small or not so solvent country, risk premiums are due. Leuchtmann points out: “Up until now, the market for bonds denominated in euros was heavily segmented.” In future, a large, liquid market for quasi-government bonds will be available. "That makes the euro interesting for investors."

The euro is already in second place behind the dollar in global payments. 43 percent of transactions are carried out in dollars, 38 percent in euros. This leads to absurd situations: if Lufthansa buys a new aircraft from Airbus in Toulouse, for example, it pays for it in dollars and not in euros.

The inertia of monetary systems is high. Unless the US government made hair-raising mistakes, such as overriding the sanctions regime. “Then the dollar could lose its function as a reserve currency, the euro would benefit from it and gain further ground,” says Leuchtmann.

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