One euro is worth one dollar. For the first time in 20 years The European currency depreciated until it reached parity with the US dollar on Tuesday. What are the concrete consequences of this depreciation?
Inflation and purchasing power
Near half of imported products in the euro zone are invoiced in dollarscompared to 40% that are bought in euros, according to the Eurostat statistics office.
This is the case for many raw materials, starting with oil and gaswhose prices have already been climbing in recent months due to the war in Ukraine.
With the depreciation of the European currency, more euros are needed to buy the products imported in dollars.
“Products imported in dollars lose competitiveness (…) and they become more expensiveexplained Isabelle Méjean, professor at the Sciences Po Higher School. This contributes to accelerating inflation and threatens the purchasing power of households.
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Another vein of this depreciation is that European tourism will be curbed, especially to the United States“said William De Vijlder, an economist at BNP Paribas.
But at the same time, tourists from the United States and other destinations gain from the exchange rate and can consume more with the same number of dollars.
Companies
The effect of the fall in the price of the euro varies according to the dependency that companies have on foreign trade and of energy.
“Companies that export outside the euro zone benefit from the depreciation of the euro, as their prices become more competitive, but importing companies are affected”, Philippe Mutricy, director of research at the public bank Bpifrance.
Firms dependent on raw materials and energy and exporting little they are going to record an explosion of their costs.
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The big winner is the manufacturing industry that exportsespecially the sectors of aeronautics, car manufacturers, luxury and the chemical industry.
Growth and debt
In theory, the depreciation of the euro makes prices more competitive and stimulates exports.
This could cushion the impact on growth of rising commodity prices in the context of the war in Ukraine, especially in more export-oriented economies, such as Germany.
For the repayment of the debt of European countries, the impact depends. Higher growth “may ease debt repayment”Méjean explained, as long as markets view European debt as safe enough and interest rates remain low.
But for states that issued dollar-denominated bondsa depreciation of the euro increases the cost of reimbursement.
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central banks
The depreciation of the euro accelerates inflation and this may prompt the European Central Bank (ECB) to raise interest rates more quicklywhen the issuer was preparing in July for the first increase for eleven years.
“We can say that the ECB should not react to rising commodity pricesbut their challenge of controlling inflation becomes more preponderant as the price of imports rises,” said William De Vijlder.
