How Will the Fall of the Euro Affect Global Economies?

---

Why Has the Euro Fallen?

The euro has fallen to its lowest level in a year, trading at nearly $1.05, raising the possibility of reaching parity with the U.S. dollar—parity being the point at which both currencies are equal. This decline arose amid concerns over Europe’s economic outlook and the impact of potential U.S. tariffs following Donald Trump’s presidential election victory on the 5th of November.

The significant psychological effect seen when the euro last reached parity in 2022 during the energy price crisis is speculated to return, further weakening sentiment toward the currency. Major financial institutions like JPMorgan and Deutsche Bank predict that reaching parity will depend on the extent of U.S. policy changes, such as tax cuts or tariffs that strengthen the dollar.

What Does a Weaker Euro Mean for Economies?

A weaker euro has mixed implications for both businesses and households. It raises the cost of imports, potentially driving up prices for essential goods like food and energy. This could reduce confidence, potentially triggering the reverse accelerator effect. As a result, European countries might see a further decline in GDP as investment begins to decline, reducing economic activity as well as foreign direct investment. However, this is less concerning as inflation in the eurozone has significantly declined and is expected to stabilize around 2% next year (according to the ECB).

On the other hand, the currency’s depreciation makes eurozone exports likely to be more competitive globally, especially in certain sectors of the economy, such as luxury or Veblen goods, as well as the automotive industry. An economy that may see the largest positive effect is Germany, home to many of the world’s largest car manufacturers, such as the Volkswagen Group. These positive effects could help to reduce the negative impacts of the euro’s depreciation.

Hope for the Euro

However, it is important to realize that the euro is not the only currency affected: most countries with major export economies to the United States, such as Japan, have also seen depreciation amid concerns about U.S. trade policies. However, the euro has held up far better than the Japanese yen, which fell nearly 10% against the dollar this year.

Despite current struggles, analysts remain optimistic about the euro’s future, highlighting that policy shifts and economic resilience could support recovery. The European Central Bank (ECB) appears less concerned about the euro's fall than during past declines due to the current low levels of inflation. Inflation trends are now moderating, and the euro remains stable compared to other major currencies. With the eurozone economy showing some positive signs, such as stronger-than-expected GDP growth in the third quarter, the ECB can continue its planned economic adjustments without major concern about the euro's depreciation.

The Bottomline

To conclude, although the threats of a declining euro are apparent—such as higher import costs and slowdowns in economic growth—the situation is not entirely bleak. Export competitiveness in sectors where Europe excels could help offset some of these effects. Moreover, the eurozone’s low and stable inflation and increasing GDP offer a buffer against prolonged weakness. Ultimately, while external factors such as U.S. trade policy remain a significant influence, the euro is expected to remain resilient in the face of these challenges.

---

Works Cited

“Why Is the Euro Falling and Could It Hit $1?” Reuters, 14 Nov. 2024, www.reuters.com/markets/currencies/why-is-euro-falling-could-it-hit-1-2024-11-13/.