Monday, May 12, 2008

The Rising Euro - Who Gains Who Loses?

The Euro has appreciated significantly against all major currencies. In particular the US dollar has fallen in value to $1 = 1.5 Euro.

Losers from Rising Euro.

  • EU exporters who are struggling to remain competitive and maintain export orders.
  • EU current account deficit is growing
  • Southern Euro members such as Italy and Spain. The strength of the Euro really reflects the strength of the German economy and the weakness of the dollar (The Euro is simply an alternative to the dollar. )
  • However, the rise of the Euro doesn't reflect the strength of the Italian and Spanish economies. For example, Spain's current account deficit is a massive 9% of GDP. But, Spain can't devalue and it can't cut interest rates. Furthermore, the pain of the high Euro, will be exacerbated by the impending bust in the Spanish Housing Market.

Those who gain from rising Euro.

  • Investors in the Euro.
  • Europeans going on holiday to US.
  • European firms and consumers who import goods and services.
  • European tourists going to the US.
  • Helps reduce inflationary pressure in the EU. It is providing an incentive for firms
  • US industry exporting to the EU. Important because the US economy is slowing down and rising exports are preventing a full blown recession.
See also:

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