For the first time in about two decades, the euro is worth exactly one dollar again. At noon, the common currency reached parity with the US currency. The last time a euro was worth exactly one dollar was in 2002 – just after the introduction of the euro as cash. The common currency of the 19 euro countries has been going downhill for months. What are the causes? And what are the consequences of the depreciation? questions and answers about it.
Why is the euro so weak?
Experts explain the weakness of the euro primarily with two developments. On the one hand, there is currently the fear of an economic crash. “Fears of recession in Europe are increasing,” comment analysts at Commerzbank. The Dekabank experts agree: “Economic fears are spreading.” There are several reasons for this, but above all Russia’s war of aggression against Ukraine has drastically demonstrated Europe’s high dependence on Russian gas supplies. Russia has already sharply reduced its supplies. If they fail to materialize, it could trigger a deep economic recession. There is a second important reason for the pronounced weakness of the euro, namely the monetary policy of the European Central Bank (ECB).
What role does the European Central Bank play?
Many other central banks, above all the powerful US Federal Reserve, have already taken up the fight against the high inflation and mostly raised their key interest rates significantly. However, the ECB is one of the few exceptions, having only made one announcement so far. In July, key interest rates in the euro zone are expected to rise for the first time in eleven years – but only by 0.25 percentage points. This is low compared to other central banks.
What are the disadvantages of a weak euro?
The increasing weakness of the euro is extremely inconvenient in the current environment with very high inflation rates. The lower the exchange rate of the common currency, the stronger other currencies such as the US dollar become in relation to it. As a result, goods imported into Germany become more expensive. This will add to the already high inflation. When the euro exchange rate falls, consumers have to dig even deeper into their pockets to cover their living expenses. Above all, the already high energy and raw material prices threaten to rise further. Because it is customary internationally to pay in US dollars. And the dollar, also known as the greenback, appreciates when the euro depreciates. Holidays in many countries without the common currency are likely to tend to become more expensive as the euro falls. And, of course, the ECB’s fight against inflation will become even more difficult.
Are there also profiteers?
Yes, especially in Germany as an export nation. Because German goods become cheaper for other countries with a falling euro exchange rate. A surge in demand due to the exchange rate could therefore lead to the feared economic slowdown being at least slowed down. However, it must be taken into account that the economic situation in many other countries is similarly unfavorable to that in Germany. Foreign demand is therefore more likely to fall than rise for economic reasons – which at least slows down the positive demand effect caused by the weak euro.
How does it go from here?
A price drop to parity does not have any particular economic effects. However, the signal effect is great: When the euro was introduced, a price quotation was not chosen for the price display as was once the case for the D-Mark. This then asks, “What does the US dollar cost?”. Instead, they opted for quantity notation, which asks “what does the euro cost?”. In doing so, they probably also wanted to set an example for the economic strength and independence of the currency union. If the exchange rate falls below parity, this will do more harm than good to the international reputation of the euro.
