The euro’s recent drop in value against the dollar comes at a “very unfortunate time,” says ING economist Bert Colijn. He points out that the sharp rise in commodity prices generally has to be reconciled in dollars. “That ensures that the prices of food and energy, already the main drivers behind the far-too-high inflation in Europe, will remain high for longer.”
Earlier this week, the euro had the equivalent value as the dollar for the first time in about twenty years. The value of the the European single currency has continued to fluctuate up and down a bit this week, even briefly trading for less than one dollar. These kinds of statistics are “mainly symbolic,” Colijn thinks. In his opinion, what matters most is that the euro has depreciated.
“The weaker euro is mainly because the traditional trade surplus of the eurozone has evaporated like snow in the sun,” the economist says. For the first time in years, the eurozone imports more than it exports. “Obviously, this is mainly due to the huge increase in import prices, especially the higher energy costs that the eurozone now has to pay. This means that the demand for dollars from the eurozone has increased strongly, while our exports are only performing moderately at the moment, and so the demand for euros from abroad has reduced.”
Colijn notes that the eurozone economy is getting worse. A brief recession later in the year is now the base scenario for the bank’s economists.
“It also seems that we mainly have the burden and not the benefits of the weaker euro,” he adds, saying it is “because the weakening has occurred especially against the dollar. Because other currencies have not necessarily become more expensive, the gain in international competitiveness is only moderate.”