Why do many people consider the EU economic and monetary union ineffective? The fact is that the eurozone lacks an important element – it is a financial union. However, everything has changed. On July 21, the EU agreed to create a €750 billion ($ 868 billion) Recovery Fund. Now, the EU has moved to a new level. It can be said that the EU countries are monitoring the situation as the agreement implies serious and long-term consequences for both the overvalued US dollar and the undervalued euro.
Europe did not miss its chance
In 2012, the eurozone was involved in a debt crisis. Then, Mario Draghi, President of the ECB, promised to do everything possible to keep the euro afloat. In fact, his promise strengthened the trust in the European Central Bank as an uncompromising protector of the single currency. However, in fact, it did not help to solve the problem. At that time, it should have been more profitable for the EU to sacrifice national sovereignty in order to create the European fiscal transfer mechanism.
However, today, thanks to the reached agreement, the EU finally has a single currency, one central bank, and a commitment to a single fiscal policy.
Of course, the deal still needs to be modified. This requires an approval of all 27 EU states. Taking into account the current situation, this will not be easy. Moreover, a real struggle has begun around the EU fund, which includes €390 billion in one-time subsidies to victims of COVID-19 and €360 billion in the form of long-term loans. The EU will issue the European sovereign bonds. This means that Europe will become another guarantor of a reliable asset. US Treasury bonds took a back seat.
Today, the general euro index is 14% below the maximum set in October 2009. At the same time, the US dollar is 29% above the level logged in July 2011. An important reshuffle between the two major currencies is just beginning. Nevertheless, the US dollar index could drop by 35%.
Analysts believe that the US dollar will continue to fall and there are reasons for this. Firstly, macroeconomic imbalances have increased in America. Secondly, the government has denied global leadership. Moreover, the historic step forward that happened in Europe on July 21 only adds confidence to the analysts' opinion.
Europe is one step ahead
While Europe has leaped forward and taken the opportunities that appeared during the COVID-19 pandemic, the United States is in an emergency situation. Domestic savings of the country are falling rapidly. Personal savings fell from 32% in April to 23% in May. Moreover, the federal budget deficit reached $863 billion just in a month, considering that for the whole 2019 the deficit was $984 billion. The US Congress intends to allocate further aid funds to combat COVID-19. This will hit the already thin internal savings even more.
Europe's leadership is obvious. According to the International Monetary Fund, the US current account deficit will reach 2.6% of GDP in 2020. While the EU is able to accumulate the current account surplus of 2.7% of GDP. The difference is 5.3%. US financial reserves are limited and the government has resorted to aggressive fiscal measures after the beginning of the coronavirus crisis. Obviously, the difference in net savings and current accounts will continue to shift, but not in favor of the United States. The greenback is in danger.
In 2017, Trump refused to sign the Paris Agreement and removed most of the environmental regulations. At the same time, Europe is fighting hard against climate change. The European Union has allocated almost a third of the expanded budget package for the green infrastructure development and related costs.
Complete failure in the fight against COVID-19
The USA is striking with the number of new diseases. Just in a day, 67,000 people were infected with the coronavirus in the country. This is a record number and exceeds the figures for June by 208%. At the same time, the situation with the coronavirus in the eurozone has stabilized since the end of May. The number of new cases is approximately 5,000. Importantly, the EU population is 35% larger than in the United States. Moreover, the US has begun to conduct fewer tests for coronavirus, and the rate of the disease is rising. However, the President's administration said that an increase in tests leads to an increase in infections. Europe is undoubtedly a leader in all positions. The era of American exceptionalism is over.
