Why is the Euro losing value? Every year, countless Americans travel to Europe for their summer holidays. Since the Euro’s early beginnings at the turn of the century, expenses in Europe were much more expensive than across the ocean.
In fact, since 2002, 1 Euro has always cost more than 1 USD or 1 CAD. During the last economic crisis in 2008, 1 Euro cost 1.60 USD. That was the peak for the currency. That rate has been slowly decreasing in favor of the American continent. In the last few months, the US Dollar has been flirting with parity with the European currency.
Traveling to Europe hasn’t been this cheap for many tourists for decades. It may benefit tourists, but not every sector of the economy benefits from this parity. Some believe the US Dollar will soon become stronger, and it will have positive and negative consequences for various parties. In this article, we will explore the causes and consequences for everyone of a weaker Euro. Let’s begin.
Why is the Euro losing value? Two years ago, 1 USD cost 1.17 EUR. At the beginning of the year, it fell to 1.13. As I write this in August, the US Dollar is on par with the Euro. What caused this sudden drop in the European currency?
To begin with, let’s have a quick summary of the Euro. Since its creation, some countries opted to ditch their local currency and use the Euro. Today, 19 European members use it: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. When so many countries use the same currency, there must be strength and unity between the nations.
For a long time, this has been the case. However, after the 2008 economic crisis, many countries have been struggling economically, namely Portugal, Greece, and Italy. It’s no wonder some countries decided to keep their currency. Switzerland and the Nordic countries are doing very well on their own.
The last few years have been particularly difficult for Europe. The continent is bordering a war between its poorest nation, Ukraine and Russia. Currently, there are energy and economic issues. Let’s explore these causes more in-depth.
Why Is the Euro Losing Value: Russian-Ukrainian War
Why is the Euro losing value? The war between Russia and Ukraine has much more dire consequences in Europe than abroad. Russia was a major exporter of oil and energy in Europe.
The EU’s response to the war was to limit Russia’s exports greatly and to lean on other countries for its needs. Unfortunately, that means a much steeper price since there is much more distance to cover to import the oil.
Across the Atlantic, we are self-reliant thanks to our supplies in Canada, the US, Mexico, and all over the Americas. Although prices have increased, they aren’t nearly as bad as in Europe. For summer tourists who rented a car, the price difference was quite noticeable. The war isn’t the only cause for a weaker Euro. Some of the roots date back to a few years ago.
Why Is the Euro Losing Value: Economic Troubles
For those who haven’t noticed yet, prices are rising. Inflation has reached a level we haven’t seen in more than 40 years.
In the US, inflation is 9% over the last 12 months. That number is almost the same when we take the EU as a whole. However, some countries are struggling more than others.
Why is the Euro losing value? Many countries are experiencing more than 10% inflation. Lithuania and Estonia are, respectively, at 21.6% and 22%.
In North America, we decided to combat inflation by raising interest rates. Two consecutive hikes of 0.75% happened. It seems to be working now, but it remains to be seen for the upcoming months. Across the ocean, the European Central Bank (ECB) has reacted slowly to the latest economic events.
In July 2022, it raised the rate for the first time since 2011. The ECB believes keeping the rates low will favor economic growth since the economy isn’t growing much. This might keep the Euro from appreciating and have consequences for different people.
Consequences of a Weaker Euro
Why is the Euro losing value? Beyond cheaper holidays for tourists, there are good and bad consequences that have already begun. For consumers in Europe, a cheaper Euro doesn’t change much. However, not everyone in Europe uses the Euro.
For example, Swiss consumers are lucky to be surrounded by the Euro. This Swiss Franc (CHF) keeps getting stronger compared to the Euro. Unfortunately, not everyone is as lucky.
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Businesses and Consumers
Why is the Euro losing value, and what does a weaker Euro mean for business? European exports will look more appealing in the markets because they become cheaper. Producers can sell more products abroad.
That’s about it for positivity. On the other hand, imports will be more expensive because of a weaker exchange rate, and consumers will feel it additionally due to rising inflation. On top of that, many invoices for products are in USD.
It might have been beneficial in the past, but not unless the trend changes. As for investments, we might see a transfer of funds from Euros to USD. Americans will see their purchasing power decrease, but their economy might grow quicker.
They are a huge supplier of military weapons to Ukraine and other European countries. War might not be good for the world, but it stimulates the economy. In the upcoming months, many things can happen around the world.
The Future of the Euro
According to many studies, citizens of countries that use the Euro are happy with the currency. They believe a unified currency is much more stable than everyone on their own.
Countries that don’t use the Euro have struggled much more than others. Over time, many countries have tried to join the European Union (EU): Turkey, North Macedonia, Montenegro, Albania, Serbia and most recently Ukraine and Moldova. The latter two aren’t exactly economic superpowers.
Their addition to the EU might have immediate negative effects. Croatia is most likely the next addition to the economic zone. The country is growing quickly thanks to tourism, but inflation is hitting its citizens very hard.
Furthermore, the actions of the ECB will influence where the currency will be going. Rising interest rates might be unavoidable. The decisions taken in the upcoming months will be crucial for everyone.
Euro Losing Value Conclusion
Why is the Euro losing value? To conclude, the Euro has been losing value since it peaked in 2008. It lost more than 60% of its value. Some stocks may gain or lose that much in a single day.
However, major currencies can’t recover as quickly. The Euro may one day reach this height again, but it can take decades. Economists in the European Union must reach a consensus about the actions they must take to stop this slow bleeding.
Conversely, tourists are enjoying their vacations at a reduced price. Many factors led to this fall. More recently, a limited supply of Russian oil and energy has crippled Europe much more than it has the Americas.
If this war lasts much longer, the European winter may be very long. Prices will keep increasing, and a recession might be in the books. This makes trading in Europe very tricky.