August 8, 2022

Dubai Week

Complete Dubai News World

What are the consequences of the euro falling to a 20-year low against the dollar?

What are the consequences of the euro falling to a 20-year low against the dollar?

Posted by:

On Wednesday, the euro fell below $1.02 in its sharpest decline in two decades. This has ramifications and consequences at many levels such as inflation, purchasing power of households and firms, growth, credit and the European Central Bank.

The euro fell below the $1.02 level on Wednesday, hitting its lowest level since 2002. What are the tangible consequences of this decline in the value of the European currency?

Inflation and purchasing power

Almost half of the products received are charged Euro zone According to data from the European Statistical Office “Eurostat”, in dollars, less than 40 percent of euros.

This is worrying for many commodities, such as oil and gas, whose prices have already risen in recent months against the backdrop of the war in Ukraine, for example. But more euros are needed to buy imported goods in dollars.

“Imported products lose their competitiveness, they face competition, and therefore they are more expensive,” explained Isabelle Megan, a professor at the University of Sciences Po in Paris.

Therefore, the depreciation of the euro against the dollar will “disrupt European tourism, especially in the United States,” warns BNP Paribas economist William de Wigelder. Since tourists need more euros to pay the same amount in dollars, the cost of staying in the US will also increase 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 currency exchange during their stay in Europe because they can consume more of the same amount in dollars.

See also  Impact Size and Analysis of the Global Portable Wireless Medical Devices Market 2021, Covid-19

on companies

The impact of the euro’s depreciation varies on firms’ dependence on foreign trade and energy. For companies that rely on raw materials and energy and that export little, such as artisan firms, costs will rise sharply, says Philippe Modrici, director of research at BPF General Bank.

The major beneficiary of the euro’s decline is the manufacturing industry, which exports its products abroad, particularly aircraft, cars, luxury goods and chemicals.

Motrici pointed out that large companies are “better prepared to receive shocks” because they have a safety mechanism that allows them to cushion currency fluctuations.

About growth and debt

In theory, a depreciation of the euro would make prices outside the eurozone more competitive, stimulating exports of European goods and services abroad.

This could reduce the effects of rising commodity prices in the wake of the war in Ukraine, particularly in export-dependent countries such as Germany.

For European countries’ debt repayments, the effect has been less pronounced. Isabelle Megan, a professor at the Sciences Po in Paris, believes that higher growth will “facilitate debt repayments” if markets view European debt as safe enough. are less.

But for countries that have issued dollar bonds, the euro’s depreciation against the dollar will raise repayment costs.

In Central Bank

An inflationary euro could encourage the European Central Bank to raise interest rates more quickly. He is preparing to lift it in July as a precedent eleven years ago.

“It could be argued that the ECB should not respond to higher commodity prices, but the challenge of restoring inflation control becomes greater as import prices rise due to exchange rate appreciation,” said William de Wigelder, economist at BNP Paribas.

See also  Oil market seeks glimmer of hope in Chinese closure tunnel .. Fear restricts demand gains

The Bank of France felt in late May that the euro’s weakness could hamper the European Central Bank’s efforts to control inflation.

France 24/AFP