Eurozone news has been dominated by two stories in 2015: Greece’s debt crisis, and the euro’s “tumble” on foreign exchange markets. Greece is undoubtedly facing a debt crisis, but is the euro truly depreciating?
The currency has certainly weakened against the dollar, falling 20 percent since its decline began in May 2014. The European Central Bank’s (ECB) much-anticipated announcement of a new quantitative easing (QE) program in January 2015 only further drove the currency’s value downward. Skeptics of the euro’s value even speak of the euro falling to parity with the US dollar this year.
The euro’s exchange rate is critical because a depreciation allows exports to become more competitive, boosting growth. This effect was certainly seen in Germany, where the German current account surplus closed out 2014 at approximately 7.0 percent of its GDP. Other euro countries like Spain hope that the weakened euro will likewise boost exports in 2015 and contribute to a sustained and substantial economic recovery.
However, the dollar is only one currency, and eurozone countries have diversified trade partnerships across many other countries besides the United States. The euro’s considerable depreciation vis-a-vis the dollar thus masks its appreciation against the currencies of many major eurozone trading partners. To account for the complexity of countries’ trade portfolios, FSG analyzes the trade-weighted impact of exchange rate variations.
Using Germany as an example, there is no question that the euro depreciated against the country’s four top export markets:
|Trading partner||Percentage of total exports||Change since 7/2014||Trade-weighted change|
However, when looking at Germany’s trade as a whole, companies should not expect a major cost competitive advantage:
(Above: While the euro has depreciated against the dollar, trade as a whole sees no change in cost competitiveness.)
The index looks very similar for other eurozone countries. Instead of a large depreciation, the euro as a whole is relatively stable, increasing costs of important imports and making exports more expensive for key customers. Furthermore, over 40 percent of eurozone countries’ export markets are made up of other eurozone countries, making euro value changes irrelevant for trade in those cases.
Impact to Multinational Corporations
The headline story of a price-competitive euro is a myth, and a depreciating euro against the USD will not translate into a eurozone recovery. As a result, any GDP-boosting export growth will require a pickup in demand rather than merely exchange rate adjustments. And as Greece renews fears of a eurozone crisis and bank lending staggers, FSG does not see a strong rise in demand for eurozone goods in 2015.
While dollar, pound and Swiss franc-based businesses can still take advantage of clear euro depreciation, a more nuanced total trade impact means that multinational corporations will need to consider their markets’ full trade portfolio to identify cost-saving opportunities. For example, a depreciated euro relative to dollar-priced commodities makes those inputs relatively more expensive for eurozone-based companies. Similarly, an appreciated euro relative to important manufacturing centers in CEE countries could result in less demand for eurozone products.
FSG is thus urging its clients to remember that headline exchange rates are just one piece of a much broader trade story. The euro’s current depreciation against the dollar is far from an automatic means to growth.
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