The euro at parity with the dollar: a first since 2002, but what consequences can be drawn from this?


published on Saturday, July 16, 2022 at 07:00

The European currency reached equilibrium with the greenback on Tuesday, July 12. This is the first time this has happened in twenty years.

But why this parity and what effects can this historical parity produce? Here are some answers.

The euro is at par with the dollar on Tuesday 12 July. This is a first since 2002. Last spring, however, it was worth around 1.2 dollars. The euro thus lost 13.2% over one year. This depreciation worries the markets and investors, who favored the greenback, considered a safe haven. The dollar has indeed gained 14% since the beginning of the year.

Effects on soaring prices and household purchasing power

According to data from Eurostat, the European statistics office, almost half of the products arriving in the euro zone (19 countries) are invoiced in dollars, against less than 40% in euros. This concerns in particular certain raw materials, such as oil or gas, whose prices have been rising since the start of the war in Ukraine, which began on February 24.

“Imported products lose competitiveness (…) and are therefore more expensive,” Isabelle Méjean, professor at Sciences Po, told AFP. This therefore means that if the euro is depreciated, then we must more European currency to buy imported products in dollars. Consequence: this leads to an acceleration of inflation and therefore threatens the purchasing power of households.

In another register, a depreciated euro against the dollar will slow down “tourism for Europeans, especially in the United States”, William De Vijlder, an economist at BNP Paribas, told AFP. As travelers need more euros to pay the same amount in dollars, the bill for their stay increases in the United States as well as in countries whose currencies are pegged to the dollar, such as Qatar or Jordan.

In the opposite direction, American, Qatari or Jordanian tourists find themselves winners. During their passage in the euro zone, they can consume more with the same amount of dollars in their possession.

For companies, variable effects

The effect of the fall of the euro against the dollar varies according to the companies’ dependence on foreign trade and energy. For companies that export outside the euro zone, “they benefit from the depreciation of the euro because their prices are more competitive once they have been converted into dollars”. On the other hand, “companies that import find themselves penalized”, summarized to AFP Philippe Mutricy, director of studies at the public bank Bpifrance.

These are the companies most dependent on raw materials and energy (and which export little) who are the most exposed and see their costs explode. However, there are industries that benefit from this euro/dollar parity, because of their exports of their products. It concerns the aeronautics, automotive, luxury and chemical industries.

What effects on growth and debt?

The depreciation of the euro makes, in theory, more competitive prices outside the euro zone. It therefore stimulates exports of European goods and services abroad. This could cushion the impact on growth of the rise in commodity prices in the wake of the war in Ukraine, especially in countries like Germany, whose economy is based on exports.

For the repayment of the debt of European countries, the effects are less perceptible. More growth can “facilitate the repayment of the debt”, explained Isabelle Méjean to AFP. Provided that the markets regard European debt as sufficiently safe and that interest rates remain low. On this subject, the Banque de France also estimated, at the end of last May, that the weakness of the euro could complicate the efforts of the European Central Bank (ECB) to control inflation.

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