The tables have turned in record time. If in September 2020 several members of the governing council of the European Central Bank (ECB), including its chief economist, the Irishman Philip Lane, and the governor of the Bank of France, François Villeroy de Galhau, saw a risk in the rise in the In the euro, just over a year later, the dynamics are exactly the opposite: the increasing divergence in the tone of monetary policy on both sides of the Atlantic has brought the single currency to lows of one year and four months against the dollar.
A cheap euro – today it is exchanged for 1.13 greenbacks, compared to 1.23 at the beginning of the year – has implications on practically all fronts: it is excellent news for exporters, who see their products become cheaper compared to its competitors from outside the euro area, but also a bad news from the energy point of view, given that both oil and natural gas are quoted in the US currency and their strengthening makes them more expensive to buy.
The transatlantic gap is greater than ever before in the next few years. With inflation on the rise around the world, the Federal Reserve has already announced that it will begin withdrawing stimulus this month by reducing the extraordinary debt purchases that it triggered in March 2020, when the economy was diluted like a sugar cane and the stampede The investor threatened to affect even the US 10-year bond, the risk-free asset par excellence. The Bank of Canada also surprised investors three weeks ago by announcing the end of its debt purchase program and by letting it fall that increases in interest rates are not as far off as it might seem. And nobody in the United Kingdom rules out that the Bank of England is inclined to increase the price of money before the end of the year. Expectations that have grown after its governor, Andrew Bailey, acknowledged his “concern” about the rise in prices.
Oblivious to these movements and to the growing pressure from the hawks, the ECB maintains its own path. Aware that a rise in interest rates would not help solve the two underlying factors that are pushing prices up – bottlenecks in global supply chains and rising energy prices – and that it would cause an earthquake of large proportions in countries that, like Spain or Italy, need their crutch to finance themselves at low cost, the Eurobanco has deepened in recent weeks in its continuation speech.
In public, at her last press conference, the President of the ECB, Christine Lagarde, acknowledged that inflation is the focus of her analysis today. But he is also confident that prices will stabilize in the middle of next year. And, above all, he remarked that the stimuli will remain intact until, at the earliest, March of next year or “until [el Eurobanco] consider that the coronavirus crisis phase is over ”, and that interest rates will not rise until 2023. In private, strong voices in the issuing institute insist on the idea that inflation is transitory and that, until it is Observe second-round effects – such as an upward spiral in wages: there, yes, we would be talking about an animal of another nature – it will not be the time to act. The opposite, they say, would jeopardize a recovery that has yet to take hold: “You don’t have to anticipate.”
Only the yen shows greater signs of weakness
This divergence in the messages emanating from Frankfurt and Washington – and also, to a lesser extent, from London and Ottawa – has accelerated the depreciation of the euro in recent weeks at its main crossings. Compared to the greenback, the single currency is trading at a 16-month low; against the pound sterling, despite the pressure derived from Brexit, it is one step away from lows of five years; against the Canadian dollar its lowest level since the beginning of 2017; and against the Swiss franc it is only 6% of its all-time low. Of the major currencies, only the Japanese yen shows greater signs of weakness than the common currency of the Nineteen.
The mechanism is simple: the expectation of higher interest rates in other monetary zones boosts capital flows to those geographies to the detriment of the euro zone, and this makes the euro cheaper. To this is added, in addition, the greater weakness of the European economy, with the latest projections pointing to a faster and more robust recovery in the world’s leading power. “The huge drop in the performance of the single currency has to do with the persistent pessimistic attitude of the ECB,” write analysts at Deutsche Bank in their latest update of their global macroeconomic picture, in which they emphasize the “disappointing” capital inflows into the euro area in recent months. This cocktail makes them think that downside risks continue to weigh more than a possible recovery in the future of the single currency.
Honey flakes for exporters
A cheap euro is music to the ears of exporters who have the majority of their customers outside the euro zone. This is the case of many German companies in the automotive sector and, above all, in capital goods. But also from many French, Italian or Irish firms that are now facing the opportunity to capitalize on this tailwind. On the other hand, the Eastern European countries and Portugal will be the least able to take advantage of the situation, due to the high percentage of sales to other neighbors of the eurozone and the relatively low weight from abroad.
Spain is in an intermediate position: slightly more than half of the exports have a final destination in another country in the eurozone. The latest data, however, seems to point in that direction: sales of goods to non-euro countries have grown in recent months at a notably faster rate than intra-euro areas, a dynamic in which the cheap euro may already be helping . Three-quarters of the same can be said of the tourism sector: despite the fact that so far this year more than half of the visitors who choose Spain come from other countries of the euro area, the weakness of the single currency makes this more attractive destination among British tourists —before the pandemic the United Kingdom was the first emitter—, Americans, Russians or Swedes, among others.
Much worse is the news on the energy flank, where, in addition, it rains in the wet: fuel purchase contracts are usually referenced in dollars, and any increase makes their final cost more expensive. And given that practically all the countries of the eurozone depend on hydrocarbon imports, their trade balances suffer from the rise of the dollar. Here, the depreciation of the euro against the dollar could not come at a worse time: in the midst of the price crisis and with oil and, above all, gas soaring. An additional factor of pressure in an already unfavorable situation.