Posted in: 06/07/2022 – 23:00
On Wednesday, the euro recorded its lowest level, reaching less than $1.02, in a sharp decline not seen in twenty years. This has had repercussions and repercussions on several levels, such as inflation, the purchasing power of families and companies, growth, debt, and the European Central Bank as well.
The price of the euro fell below the threshold of $1.02 on Wednesday, hitting its lowest level since 2002. What are the tangible repercussions of this decline in the value of the European currency?
On inflation and purchasing power
Almost half of the products received are billed to Euro-zone In dollars, compared to less than 40 percent in euros, according to data from the European Statistics Office “Eurostat”.
This concerns, for example, many raw materials, such as oil and gas, whose prices have already increased in recent months once morest the background of the war in Ukraine. But more euros will be needed to buy imported goods in dollars.
“Imported products lose their competitiveness, they will face competition, and therefore they will be more expensive,” explained Isabelle Megan, a professor at Sciences Po University in Paris.
Thus, the depreciation of the euro once morest the dollar “will clearly disrupt European tourism, especially in the United States”, warns William de Vijelder, an economist at BNP Paribas. And since tourists need more euros to pay the same amount in dollars, their bill for staying in the United States will rise as well as in countries that have pegged their currency to the dollar (Qatar, Jordan, etc.)
On the other hand, American tourists, as well as Qataris and Jordanians, benefit from the currency exchange, while staying in the eurozone, as they can consume more of the same amount in dollars.
on companies
The impact of the depreciation of the euro on companies’ dependence on foreign trade and energy varies. For companies that rely on raw materials and energy and that export little, such as artisan companies, says Philippe Motrici, director of studies at Bpifrance General Bank, costs will rise sharply.
The biggest gainer from the euro’s decline is the manufacturing industry that exports its products abroad, especially aircraft, cars, luxury goods and chemicals.
Motrici pointed out that large companies are “better prepared to receive shocks” because they have a protectionist mechanism that allows to mitigate currency fluctuations. “They buy currencies in advance at an attractive rate that protects once morest exchange rate fluctuations,” he explained.
On growth and debt
In theory, the depreciation of the euro would make prices more competitive outside the eurozone, which would stimulate the export of European goods and services abroad.
This may mitigate the consequences of rising product prices on the background of the war in Ukraine, especially in countries whose economies depend on exports, such as Germany.
For European countries’ debt repayment, the effect is less clear. Isabelle Megan, a professor at Sciences Po in Paris, believes that more growth would “facilitate debt repayment”, provided that markets consider European debt secure enough and remain sufficiently secure. Interest rates are low.
But for countries that issued dollar bonds, the depreciation of the euro once morest the dollar would raise the cost of repayment.
on the central bank
A depreciating euro, with accelerating inflation, may encourage the European Central Bank to raise interest rates faster. He is preparing to lift it in July, a precedent eleven years ago.
“It can be argued that the ECB should not respond to higher commodity prices, but the challenge of restoring inflation control becomes greater because import prices are increasing due to exchange rate appreciation,” said William de Vigelder, economist at BNP Paribas.
The Central Bank of France considered at the end of May that the weakness of the euro might impede the efforts of the European Central Bank to control inflation.
FRANCE 24/AFP
