Euro's Strong Appreciation Challenges Eurozone Economy and Industry

Since 2022, the euro has experienced a significant appreciation against major currencies, presenting notable challenges for the eurozone's economy and manufacturing sector. From October 2022 to January 2026, the euro surged from $0.97 to $1.16, while also rising against the yen, renminbi, and British pound. The nominal effective exchange rate of the euro appreciated by 16% between July 2022 and December 2025.

This currency strength has contributed to a slight reduction in the eurozone's trade surplus for goods, which fell from €157 billion in 2024 to €153 billion in 2025. Manufacturing production has also declined by nearly 6% from its peak in late 2022 to November 2025, with the Purchasing Managers' Index (PMI) for manufacturing dropping to 48.8 in December 2025, signalling contraction.

The appreciation is partly influenced by comparatively lower short-term interest rates in the eurozone (2%) versus the United States (3.5%) and the United Kingdom (3.75%), alongside concerns over US and UK budget deficits.

The European Central Bank (ECB) faces a complex dilemma: inflation remains persistent, limiting its ability to cut interest rates to counteract the euro's strength. Moreover, inflation differentials—with declining industrial prices and rising service prices—complicate policy responses. Experts suggest that non-monetary solutions, including addressing currency manipulation by countries like China and Japan, may be necessary to mitigate the eurozone's deindustrialization risk.

Without effective intervention, the euro's appreciation could accelerate challenges facing the eurozone's external trade and manufacturing base, threatening broader economic stability within the region.