In this issue we look at what ails the euro. What are the underlying economic factors?

1. 9/26/11

2. The Euro at a Crossroads The European Union consists of the following countries.

3. The Euro at a Crossroads Of the 27 members of the EU, these 17 countries use the euro as their currency. These 17 countries make up what is called the “Euro Zone.”

4. The Euro at a Crossroads The euro became the common currency in the euro zone in 1995 and began worldwide circulation about a decade ago.

5. The Euro at a Crossroads The worldwide economic recession affected the euro around 2009. This chart shows the exchange rate between the euro and the dollar. Note the steep decline in 2009.

6. The Euro at a Crossroads This chart shows the euro vs. the Japanese yen. Once again, not the steep decline in 2009.

7. The Euro at a Crossroads While the dollar and the yen have had their own problems, here is a chart showing the exchange rate for the euro and the much more stable Swiss Franc. This much more clearly shows the struggles the euro is having.

8. The Euro at a Crossroads A common currency may ease some economic inefficiencies but it doesn’t overcome the underlying economics. The 17 Euro Zone countries have very different economies.

9. The Euro at a Crossroads This chart shows the Gross Domestic Product (GDP) for 2010 for the Euro Zone countries. Note the drastic differences in economic output across the 17 countries.

10. The Euro at a Crossroads Furthermore, while each country has a different level of economic output (GDP), each country incurs a national debt at a different rate. This is where the problems with the euro have emerged.

11. The Euro at a Crossroads Five countries–Italy, Spain, Greece, Portugal, and Ireland–have national debts that are close to or exceed 100% of economic output.

12. The Euro at a Crossroads When a country’s debt is so high, then it becomes more expensive for that country to borrow more money. BUT, since these countries all rely on the euro, it is the common currency that is affected.

13. The Euro at a Crossroads Furthermore, unlike the U.S.—which has its own debt problems—these Euro Zone countries cannot print more currency, since they do not “own” the currency.

14. The Euro at a Crossroads The decline in the value of Euro, while stemming from a handful of countries, is affecting the entire European economy.

15. The Euro at a Crossroads The solution is to do two, almost contradictory things: grow their economies and reduce their national debt.

16. The Euro at a Crossroads Unless and until all of the Euro Zone countries have stable and growing economies, the euro will continue to struggle.

17. The Euro at a Crossroads In the extreme case where a country default on its debt, then euro could cease being a common currency, at least for the defaulting country.

18. The Euro at a Crossroads In 2010, the EU created the European Financial Stability Facility (EFSF) to help shepherd the affected countries and the EU out of these financial difficulties.