In 2022, the dollar became more expensive than the euro for the first time in 20 years

The euro completed its 20th anniversary in 2022, but the year was marked by a negative fact: for the first time, the currency had a lower value than the dollar.

Since its inception, European money has always been worth a few cents more than the dollar. In July of this year, the two currencies reached parity. August 22, the euro was quoted for less than 1 dollar. Each European coin was worth 97 cents of American money. Or each dollar was worth 1.0061 euros.

The euro’s fall was caused by several factors. The Ukrainian War, which started in February, increased the prices of gas and other products on the continent, generating uncertainty and inflation. It was necessary to seek alternatives to Russian gas, which kept homes warm and industries running.

At the same time, in March, the Fed (US central bank) started to raise interest rates, which attracted foreign money to the US and strengthened the dollar. At the same time, the ECB (European Central Bank) had a more restrained posture and was slow to change interest rates, which were below zero.

However, the European autumn came with warmer than expected temperatures (which generated lower demand for gas) and the ECB’s firmer action in raising interest rates, starting in September, helped the European currency to regain strength.

The euro stayed for about three months, until the beginning of November, oscillating around the rate of 1 to 1, until it regained strength from November 12th, when it stabilized at a range of 1.03 euros per dollar. Close to Christmas, on Monday (19), each euro was worth 1.06 dollars. Two years ago, in December 2020, this quote was around 1.20 dollars

In mid-December, the ECB made the third increase in interest in a row and raised the rate to 2% per annum. In the US, the Fed slowed down interest rate hikes and raised the rate to 4.5%. In Brazil, the Selic was maintained at 13.75% per annum at the last Central Bank meeting.

Cristine Lagarde, president of the ECB, indicated that the bank should continue raising the rate next year, to contain the risk of inflation. “Based on the information we have today, another 50 basis point increase is forecast at our next meeting, and possibly the one after that, and possibly after that as well,” Lagarde said at a press conference on Dec. 15. She also said she expected a possible recession in Europe to be “relatively short and shallow.”

The single European currency was adopted on January 1, 2002, and replaced the currencies of almost all Western European countries, such as Spanish pesetas, German marks, French francs and Portuguese escudos. By giving up the national currency, countries facilitated trade with their neighbors and started to have stronger and more stable money than they had before. On the other hand, they lost power to define monetary policy, which was under the command of the ECB (European Central Bank).

However, each country is still free to define its fiscal policy, that is, to decide how much to collect taxes, how to spend public money and borrow if necessary.

As the continent has countries with stronger economies (Germany, France) and more unstable ones (Spain, Greece), there was an imbalance. Greece, for example, had to submit to public spending cuts in the past decade in order to obtain help from its neighbors to overcome a severe crisis in the past decade. The country considered leaving the euro at the time but ultimately stayed.

Josilmar Cordenonssi, professor of economics at Mackenzie University, explains that the advantage of the euro’s value over the dollar is largely the result of the strength of the German economy, the fourth largest in the world.

“Germany is more fiscally conservative than the United States and has much lower debt than the rest of the advanced countries, around 60% of GDP. In the US and Japan, they exceed 100% of GDP. High debts generally weaken currencies”, explains Cordenonssi.

The professor points out that a possible devaluation of the euro against the dollar could disrupt Brazilian exports to Europe, as products from here would be more expensive for consumers there. Devaluation would also make European products more competitive on the international market.

Currently, the euro is used in 19 countries. On January 1, 2023, Croatia will adopt the currency and become the 20th member of the eurozone. There are six other candidate countries to adopt the euro, but which first need to meet a series of economic stability requirements.