Europhoria

May 19th, 2025

Ian Cheng

In recent months, the euro has risen to a 3 year high against the dollar. On April 22nd, 2025, the ratio hit its peak at about €1.15 euro per dollar, while in mid-January, one USD amounted to €1.02 euro. Using these statistics, the value of €100 billion euros has increased by $13 billion US dollars. Even though the dollar has seen a small rally because of the US and China’s agreement to pause tariffs for 90 days, the difference is still noticeable. Overall, the exchange rate has increased by 9% (favoring the euro over the dollar.)

Why has it happened?

One reason is because in recent months, the US dollar doesn’t look as stable and safe as before. Trump’s economic policies have people not knowing what’s coming next. So, many economists advise turning away from assets like Treasury bonds. As of May 18th, the US has lost its last perfect credit rating from the firm Moody’s, demonstrating a loss of trust in the USD. ECB (European Central Bank) president Christine Lagarde believes the euro can be an alternative to the dollar’s role as a global reserve currency if its integration is pushed.

However, it's also about what’s happened domestically as well. In late March, Germany agreed to adjust its infamous “debt brake,” meaning that defense spending above 1% of GDP will now not have any borrowing limit. Alongside that, a €500 billion infrastructure fund that has to be spent by 2037 has been created. A positive economic outlook for Germany under its new ruling coalition comprising the CDU and the SPD has increased investor demand in euro-related assets, causing the rise in value.

The Good

On the surface, it all looks great. A higher-valued currency allows European countries to import/buy more foreign goods without spending as much. Consumer spending power will also increase, driving up confidence and consumption, giving many domestic companies the opportunity to grow and become competitive in the global market. Most importantly, this gives Europe an opportunity to revitalize their economy. Consumer spending has always been a problem, with the highest rate of economic optimism being just 32% in Spain.

The ECB can take a breath of fresh air. After cutting interest rates by 1.75% since June 2024, they can keep the current, relatively low rate of 2.25%. It presents a unique economic change because usually, interest rates have to be driven up to strengthen a currency. The euro’s rise makes it less likely that the bank has to continue rate cuts to stimulate the economy. As a result, cuts can be kept as an emergency tool to deal with a potential financial crisis.

The Bad

However, since this rise was so unexpected, some companies are fearing for their lives. Companies in the STOXX Europe 600 index get 60% of their revenue from abroad. Since a stronger currency makes buying European products more expensive, revenues for already big companies could shrink. For example, SAP, a German software company, estimates for every $0.01 rise in the euro, it could lose $30 million dollars in yearly revenue. SAP is the most valuable company in Europe and is worth about $364 billion dollars.

More specifically, the automobile industry may be hit even harder. Due to Chinese pressure and a 25% auto tariff by the United States, big corporations like Mercedes-Benz and Audi were forced to drive up prices. The euro’s surge will make these cars even more expensive and thus unattractive to consumers. Considering that 3.4 million vehicles were exported from Germany alone in 2024, this is a big deal.

Conclusion

This shift has many geopolitical implications. Ukraine’s war effort against Russia could be bolstered, because European governments now have more power to buy weapons and supplies from abroad. It also shows Europe’s resilience against the United States, because despite tariffs, there are telltale signs of better economic performance. Finally, it suggests that de-dollarization may be coming, potentially shifting power balances toward Europe if the euro emerges as the main replacement. With global economics becoming more eventful than ever before, the situation of the euro is a key point to take note of.

Extemp questions: What will be the impacts of the euro’s recent rise in value? Is the euro’s surge more beneficial or harmful for the European economy?