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1 euro = 1 dollar: good or bad news for the economy?

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1 euro = 1 dollar: good or bad news for the economy?
Written by madishthestylebar

If the purchasing power of the French will suffer from the fall of the euro, exporting companies will benefit from a significant gain in competitiveness conducive to growth.

A euro is worth a dollar. With the fall in the rate of the euro against the dollar for several months, the European currency has fallen to its lowest level for 20 years.

Since December 5, 2002, the date on which the euro rose above the dollar, the parity has always been favorable to the European currency.

Over the past two decades the euro has fluctuated, climbing to $1.60 in the summer of 2008 and then yo-yoing. But since the end of the health crisis, he has picked up. In one year, the euro, which was still worth $1.19 in July 2021, has fallen by 16% against the greenback. It also depreciated against other major currencies such as the Chinese yuan or the Swiss franc.

This fall reflects the markets’ concern for the euro zone. War in Ukraine on our doorstep, the continent’s energy dependence on Russia, double-digit inflation in some countries, oil purchases that must be denominated in dollars… Europe seems more exposed to economic hazards than United States.

Especially since the European Central Bank has not increased its key rates unlike the US Fed, which made the largest increase in 28 years last June.

Investors therefore prefer to sell their euros and buy dollars, a more profitable safe haven in these times of uncertainty.

Hard on purchasing power

So, good or bad news, this dropout of the euro?

For the purchasing power of Europeans, the consequences are negative and are already being felt with inflation. For example, a phone worth 500 dollars could be bought for the equivalent of 420 euros a year ago when the euro was worth 1.19 dollars. Now, with parity, it is therefore theoretically worth 500 euros. A net loss of 80 euros in purchasing power. Non-food products could in turn experience an inflationary surge if the euro continues to fall.

However, this is the case for the 25 categories of products most purchased in France (computers, televisions, textiles, various equipment, etc.) are all mainly imported. Ditto for fuel: oil purchases are denominated in dollars and the drop in the euro could mitigate the impact of the fall in prices observed in recent weeks.

Bad news also for some sectors. Like the airlines that are highly dependent on kerosene prices or the small companies that do not export and which will suffer from the rise in costs without benefiting from the gain in competitiveness made possible by a weaker currency.

Jackpot for Airbus

Because, conversely, for exporting companies, the fall of the euro is a godsend. A 10% depreciation of the euro should, according to economists, lead to an increase in exports to foreign countries of 7 to 8%.

In aeronautics, for example, Airbus should see its order book soar. The former CEO of European aircraft manufacturer Louis Gallois estimated that a drop of 10 cents in the euro against the dollar was 1 billion euros in profit for the company.

In France, it is obviously the luxury, wine and agri-food sectors that should benefit. The trade balance between France and the United States, which has been favorable to France for three years (+1.6 billion euros in 2020), should increase further this year.

A final sector will benefit: tourism. Americans who had already been returning in droves for a few months would have to spend even more. The Chinese too, who have seen their currency appreciate by more than 15% in one year, will try to spend more in France.

Enough to restore a little tone to our European economies threatened with recession.

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