Euro-Dollar Parity: A European Recession Is Inevitable

The Euro has fallen to its lowest in 20 years, and is in parity with the US dollar. The Euro has fallen down about 12% since the beginning of the year and the exchange rate between the dollar and the Euro is just one cent apart

The war in Ukraine has provoked many economic downward spirals and European countries are anxious of recessions. The fall of the Euro accelerated in recent days after Russia cut off Nord Stream 1, the pipeline that delivers gas to Germany, for maintenance. Though Russia has promised to continue the flow of gas to Europe by July 22nd,  the air is filled with worry that Putin will discontinue its distribution of gas to Europe indefinitely to retaliate the sanctions placed on Russia by Western countries and NATO.

So far 12 EU countries have experienced total or partial reduction in Russian gas

The July 12 exchange rate fall marks the weakest the Euro has been since 2001, and it is troubling Europeans due to a lower purchasing power.

Practically half of imported goods into Europe are invoiced in dollars including oil and gas, meaning European companies will need more euros to purchase the equivalent quantity of goods as before. The affliction of the depleting Euro compared to the dollar signifies that European businesses will endure more obstacles than they already have at the hands of inflation. Consumers will suffer the same fate, as business owners will have to lay some of their costs off to the buyers. Inflation has been worsening in Europe, and this exchange rate parity is going to be a turning point. 

The recent energy crisis that came as a byproduct effect of the war has caused a rise in inflation, mostly in developed nations. Food shortages and spikes in gas prices are proliferating throughout the world.

International travelers using the dollar will substantially benefit from the US-Euro parity, though the same does not apply to Europeans. Purchasing goods from the US and traveling to the US will become more expensive. People who make their income in euros won’t experience much of an advantage either. European multinational corporations with a big market population in the US can expect to make profit off of their American buyers, due to prices becoming relatively more affordable for American buyers, thus demand in that market is likely to increase.

Although European exports can exploit the opportunity to increase the price of their products, the global scale of this economic hardship will cause cost-related issues on the buyer’s end. “Given the nature of Germany’s exports which are commodity-price sensitive, it remains hard to imagine that the trade balance could improve significantly from here in the next few months given the expected slowdown in the eurozone economy,”– a Saxo Bank foreign exchange strategists recently wrote. Exports that fall under the commodity-price sensitive category are expected to be disadvantageous by virtue of consumer’s unwillingness to purchase these goods for a higher price than normal.

The US Federal Reserve Board keeps raising interest rates, a long term approach for lessening demand, and will eventually allow the price of goods to drop back down to the value of the currency. The European central bank is likely to take the same precautions and make borrowing less attractive. 

According to sources, “The ECB announced that it will hike interest rates this month for the first time since 2011, as the eurozone inflation rate sits at 8.6%,” but some economists argue that these measures should have been put in place months ago because a recession is almost inevitable.