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2011: a Rocky Year for the Euro

January 4, 2012

Of course, the biggest news in Europe in 2011 was the European Debt Crisis.  While only one new country (Portugal) received a bailout from the EU, as opposed to two in 2010, European leaders were forced to meet almost quarterly to craft solutions for the heavily indebted countries.  In addition, 2011 saw the increase chance that two of the EU’s largest economies—Spain and Italy—might also need assistance.  The result was that governments fell in Greece and Italy while Spanish voters replaced their government, all in an attempt to calm the markets and insure solvency.

However, the markets were anything but calm in 2011.  The euro started the year off trading at about €1 = $1.33, and finished the year at €1 = $1.29, which is about a 3% decline.  However, as the graph below shows, there was a lot of variation in between.  At one point in early May, the euro reached $1.49 before beginning its long and less than steady decline.  While the euro declined against the dollar, interest rates in Europe continued to rise, and Italy still hangs perilously close to the threshold that many believe would require a bailout (see post). 

As a result, 2012 will probably be the year of reckoning for the euro, as one of two things will occur—either a solution is found that solves the underlying deficiencies in the euro or else one or more countries could find themselves out of the currency block.  The European Union Center at Indiana University will continue to offer events and information on this crisis, with our first event being The Euro Crisis: Sovereign Debt or External Imbalances? on Thursday January 12.

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