How Will the Euro Fare in 2012?

How Will the Euro Fare in 2012?

As the most anxious year in the history of the euro draws to a close, and with dire predictions about the euro’s fate in 2012, it is an irresistible option for this author to take stock in a more realistic way. Despite all this year’s drama, the value of the euro is almost exactly where it was at the beginning of 2011. Indeed it seems 2011 and its attendant turmoil might just as well not have happened. It was certainly noannus horribilis for the value of Europe’s currency. As Figure 1 shows, the real effective euro exchange rate today is above what it was in May–June 2010, when the crisis was only about Greece, and even slightly above what it was when the crisis spread to Ireland and Portugal in late 2010. After the prolonged decline in the real trade weighted value of euro1 following the revelation of the fraudulent Greek fiscal data in October 2009, it is almost as if investors actually stopped worrying, as it became clear by May–June 2010 that in the euro area (like everywhere else) the bailout that some doubted did happen.

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