Despite 2019 marking the 20th birthday of the euro, there was little for the central currency to celebrate this year. It was under pressure due to a downturn in economic performance across Europe. Over the last 20 years, the euro has strengthened by 27% against the pound, with nearly half of those gains being made following the UK’s referendum result to leave the EU. However, it is 3.5% lower against the US dollar over the last two decades. The global slowdown, its impact on Europe and its effect on international trade tensions put pressure on the euro this year.
Protracted economic slowdown
The market watched the Purchasing Managers’ Indices (PMIs) with concern as manufacturing and services both showed the result of the economic downturn, with many starting in the expansion zone and moving to contraction by the end of the year. The numbers from economic powerhouse Germany were of particular concern and as the year progressed and business confidence tumbled, so too did the euro. The currency held its own against sterling for most of the year, but elsewhere it was challenged by the US dollar and a basket of currencies as the downturn began to bite and even small glimmers of hope towards the end of the year appeared to be ignored by the market.
International trade and the impact of global events
The downturn in Europe was mirrored across the globe; weaker than expected economic results from China in April pushed the euro lower as the impact of the US-China trade war was seen. The euro fell after the news as the knock-on effect for Europe’s economy was due to stocks for basic resources having a heavy exposure to China. In May, the euro was given a boost against sterling when the US postponed trade tariffs on European-made cars, however, lost out to the US dollar. September also saw the euro lose out to the greenback after oil prices pushed the US dollar higher. The loss was short-lived after the US Federal Reserve’s September minutes gave the euro a 0.1% gain against the US dollar. In October, Europe appeared to shrug off the US plans to impose tariffs on a range of EU goods including whiskey, aircraft, cheese, and biscuits. Of more concern was the global impact of the US-China trade war, which is putting pressure on trade routes and resources and is seen as a key factor in the ongoing downward pressure on the economy, particularly with Brexit also looming on the horizon.
All change at the top
While the pound was weighed down by political stasis, Europe faced a different challenge with numerous elections across Europe and results which reflected the air of uncertainty as Europe faced the economic slowdown. Spain had two elections within the year, the first in February after the prime minister’s budget was rejected and the second in November after the coalition failed to deliver results. The result of the fourth election in four years for Spain was another coalition and the euro fell by 0.2% against other major currencies. In Austria, the nationalist vice-chancellor Heinz-Christian Strache was forced to resign, which in turn led to a general election. A similar trend was replicated across Europe and in the European elections, with centrist candidates losing ground to green and far-right parties. The poor showing of Germany’s SDP meant the resignation of Andrea Nahles and in turn, this meant Angela Merkel’s CDU lost their junior coalition partner. Political change was welcomed in Greece, however, when the election of center-right New Democracy was elected with Kyriakos Mitsotakis at the helm. The euro didn’t react but it may have positive implications for tourism and the Greek economy which reduces risk to the euro. Despite political turbulence and the breakdown of the coalition government, a new coalition between Five Star and the center-left Democratic Party was towards the end of the year was good news for the euro because it may mean there will be less friction with the EU in the future.
ECB actions influence euro performance
The actions of the European Central Bank (ECB) have had a significant influence on the central currency this year as it reflected on the global downturn and the impact in Europe. Mario Draghi set the tone at the beginning of the year, stating "the risks surrounding the euro area growth outlook have moved to the downside" and this was borne out through the year. By June, the ECB was in a challenging situation as inflation remained below the 2% target and there were no further cuts that could be made to interest rates and the possibility of resuming a Quantitative Easing (QE) program was mooted. The euro dipped on the possibility and by August, hints at a forthcoming stimulus package put pressure on the central currency. In general, the euro was keeping its head above water against the pound because of Brexit pressures on sterling, but it was clear that the currency wasn’t immune to changes in the geopolitical landscape. By the end of the summer, interest rates were in negative territory and Mario Draghi announced the planned QE stimulus package, which began in November. In October, a new ECB president took the helm - Christine Lagarde used her maiden speech to call for "strength, resolve and courage" in European capitals. There is some dissent in the ECB about the planned course of action regarding QE but concerns over the current policy were largely overshadowed by the future of the European economy and how else the ECB could respond. Heading into 2020, the euro is facing a challenging landscape and with so much change on the horizon, it’s unclear whether the euro will be able to maintain its largely steady course despite outside pressures.