Understand the consequences of the euro parity with the dollar

A euro is worth a dollar. For the first time in 20 years, the European currency devalued until it reached, on Tuesday (12), parity with the American currency. What are the concrete consequences of this devaluation?

Inflation and purchasing power

Almost half of the products imported into the euro zone are invoiced in dollars, against 40% bought in euros, according to the Eurostat statistics office.

This is the case for many commodities, starting with oil and gas, whose prices have already risen in recent months due to the War in Ukraine.

With the devaluation of the European currency, more euros are needed to buy imported products in dollars.

“Products imported in dollars lose competitiveness (…) and become more expensive,” explained Isabelle Méjean, a professor at the Escola Superior Sciences Po, which contributes to accelerating inflation and threatens the purchasing power of families.

“Another vein of this depreciation is that tourism from Europeans, especially to the United States, will be contained,” said William De Vijlder, economist at BNP Paribas.

Meanwhile, tourists from the United States and other destinations earn from the exchange rate and can consume more for the same amount of dollars.

Companies

The effect of the fall in the price of the euro varies according to the dependence that companies have on foreign trade and energy.

“Companies that export outside the euro zone benefit from the devaluation of the euro, as their prices become more competitive, but importing companies suffer,” says Philippe Mutricy, director of research at public bank Bpifrance.

Companies dependent on commodities and energy and exporting little will experience a spending boom.

The winner is the manufacturing export industry, mainly the aeronautics, car manufacturers, luxury and chemical industries.

growth and debt

In theory, the devaluation of the euro makes prices more competitive and stimulates exports.

This could cushion the growth impact of rising commodity prices in the context of the Ukrainian War, especially in more export-oriented economies such as Germany.

For debt repayment of European countries, the impact depends.

Higher growth “can make debt repayment easier,” noted Méjean, as long as markets see European debt as safe enough, and interest rates remain low.

For states that have issued bonds denominated in dollars, a devaluation of the euro increases the cost of repayment.

central banks

The devaluation of the euro accelerates inflation, and this can lead the ECB (European Central Bank) to raise interest rates more quickly. This month, the issuing body prepares for its first increase in 11 years.

“One could say that the ECB should not react to rising commodity prices, but its challenge of controlling inflation becomes greater as the price of imports rises,” says economist William De Vijlder.