This year the euro celebrates its 20th anniversary since its creation. An event that sparked many thoughts on the successes and challenges related to the principle of the single currency in the euro area. Most of these analyzes have rightly focused on the economic performance of this single-currency zone. The main objective of this monetary union was, after all, to maximize the advantages of the functioning of the internal market of the EU and thus to place Europe on a stronger dynamic of above all economic growth.
Forex: definition and reaction
Let’s start by recalling that the Forex, also called the foreign exchange market, is defined as a network of buyers and sellers who transfer currencies between them at an agreed price.
Indeed, things seem very messy at the moment, especially in the foreign exchange market (Forex) where the euro is practically at parity with the dollar. Although the euro is the second most used currency by most criteria, it is often in strong rivalry with the dollar. This impacts different parties, both positively and negatively.
The euro exchange rate has been falling for months and is now at the same level as the US dollar. A year ago, one euro cost $1.20, and by the start of 2022 it had already plunged to $1.13. Since then, the depreciation has continued and peaked with a brief tie with the US dollar in mid-July, before falling below the 1 dollar mark a few days later.
Experts identify two main reasons why the euro has lost value, one being the meteoric rise in inflation in the euro zone, the other being the European economic instability triggered by the onset of shortages and monopolization of materials raw, like gas.
Advantages of the single currency of the euro zone
The circulation of the euro in the euro economic zone will make it unnecessary to buy or sell currencies for trade between the 19 countries, and the transaction contracts between the countries will not be subject to uncertainties regarding future exchange rates. This encourages intra-European trade, and also motivates consumers to buy products from the euro zone.
What does the euro-dollar parity mean?
It means that the European and American currencies have the same value. Indeed, the exchange rate of a currency can indicate economic prospects, and those of Europe have faded.
Rising energy prices and exceptional inflation are the main causes. You should know that Europe being much more dependent on Russian oil and natural gas than the United States, this puts this economic zone in a situation of weakness, so it will encounter difficulties in running industry and generating energy. electricity, which is already the case in a few countries like Germany.
Fears that the war in Ukraine will lead to a loss of Russian oil on world markets has driven up oil prices. Then Russia cut natural gas supplies to the European Union, which European leaders described as retaliatory measures for subsidies and arms deliveries to Ukraine. This restriction or reduction in gas delivery seriously impacted Germany in the first place. For this reason, the energy ministers of the European Union met and reached a gas consumption reduction agreement in order to help Germany as well as cushion the blow in the event of a shortage.
Effects on international trade
The European territory has a population slightly larger than that of the United States and a GDP slightly lower than the Gross Domestic Product of the United States. The two regions are therefore of comparable size economically, but the United States has a much larger geographic area and therefore a much lower population density.
Effects and possible results of parity
- This equality of value will impact several businesses and countries. In particular, this situation is more profitable for American citizens. Indeed, American tourists will pay for their holidays (in the euro zone) much less than usual, thanks to cheaper bills from their point of view.
- In addition, a weaker euro could make export products of European origin more price competitive in the United States. The United States and the EU being important trading partners, the variation of the exchange rate will necessarily be observed.
- In the United States, a stronger dollar means lower prices for imported goods and, conversely, EU countries could reduce the number of products imported from the United States and encourage the consumption of local and European products.
- This parity will make US-made products more expensive in foreign markets, widening the trade deficit and reducing economic output, while giving foreign products a price advantage in US territory.
Finally, a depreciated euro can be a real dilemma for the European Central Bank and also in the foreign exchange market, as it can lead to higher prices for imported products, especially oil, which are priced in dollars. The ECB is already tugged in different directions and poised to raise interest rates, the typical remedy for inflation, but higher rates can also slow economic growth.