What is behind the current weakness of the euro

The euro has recently repeatedly slipped below the $1.12 mark. In January, the euro exchange rate was temporarily above $1.20. What is the burden on the European common currency?

Concerns about public finances in Europe

“The French brought this on us,” said Carsten Brzeski, chief economist at ING, in an interview with the ARD financial editorial team. The expert points to French public finances. France is the second largest economy in the Eurozone and currently has a national debt of 119 percent of gross domestic product.

"Investors read about budget problems in France and see that there are other countries with high levels of public debt." Brzeski points to Italy, Greece and Belgium, "although the budget positions there are significantly better." But the financial markets are not interested in that. "They look at the high national debt and worry whether there could be another euro crisis."

There are also political uncertainties

What is also depressing the mood are the many political uncertainties in the Eurozone. Presidential elections are scheduled for spring 2027 in France. The result is unclear, including what the election outcome would mean for Europe.

Another example is Spain. The dispute over housing market policy has escalated there. Prime Minister Pedro Sánchez then announced an early parliamentary election in November.

The fact that energy, food and many other everyday items have become significantly more expensive in recent years is putting the middle class and especially low-income households under pressure. Concern about a loss of living standards is fueling anger at governments.

Too little growth

“But the real problem is that France and the Eurozone as a whole are growing so little,” said economist Eckard Schulte from MainSky Asset Management in an interview with the ARD financial editorial team. He compares France to the USA. "If they have a deficit of five or six percent, then it makes a difference whether they grow nominally at six or seven percent like the USA or at one percent like France."

This has an impact on the debt levels in the respective economies. And it is causing great concern for investors.

Euro weakness and no dollar strength

"When you look at the euro-dollar rate, it's not just about the strength of the dollar, but also the weakness of the euro due to the political situation in France," said Tommy von Brömsen, foreign exchange strategist at Handelsbanken. This also has a lot to do with the structural problems in the eurozone, adds Eckard Schulte. "The eurozone is still a fragmented entity. We may have a common currency, but we always have this vulnerability to national financial markets."

Schulte does not believe that the current weakness of the euro will change any time soon. "I don't see that the euro can appreciate significantly in this environment."

No new debt crisis

Despite all the problems and turbulence, many economists do not want to talk about an emerging European debt crisis. “France will not go bankrupt. The European Central Bank will probably come to the rescue,” believes Carsten Brzeski. "You'll muddle through a bit."

The euro still plays an important role in the foreign exchange market. It is the second most important reserve and reserve currency in the world after the dollar. The euro is one of the most heavily traded currencies.

But Brzeski says nothing will change in the dominance of the dollar and the economic importance of the USA any time soon. He points to the large capital market there, “in which it is worth investing.” In addition, the US economy is growing faster than the European economy. "And because there are few real alternatives."