Experts have identified two main reasons why the euro has lost its value and its potential impact on the European Union.

The euro’s exchange rate has fallen for several months and is now at the same level as the US dollar. A year ago, the price of 1 euro was $ 1.20, but by the beginning of 2022 it had already plummeted to $ 1.13. Since then, the decline has continued, almost equal to the US dollar on Tuesday and below $ 1 on Wednesday.

Experts have identified two main reasons why the euro has lost its value. One is the soaring inflation rate in the Eurozone (EA), Sushanta Mallick, a professor of international finance at Queen Mary University in London, told Al Jazeera.

“In June, EA inflation averaged 8.6%, with 14 small eurozone economies experiencing above-average 22% inflation in Estonia. Only 5 eurozone economies are below this EA average.” He said.

“This upward trend is due to rising energy prices due to the conflict between Russia and Ukraine,” he added.

Indeed, the US economy has so far been “much more affected by the Ukrainian War than in Europe, which remains unaffected by fluctuations in oil and gas markets, given oil reserves and the use of alternative energy sources. Not received. Mr. Malik is up compared to the euro. “

“Safe shelter status”

In addition, in contrast to Europe, US interest rates have risen for several months, making investment in the US dollar more attractive, according to Lucio Sarno, a professor of finance at the University of Cambridge.

“Rising US interest rates attract more investment in dollar assets, which adds to the strong demand for the dollar driven by the status of a safe haven during the war,” he told Al Jazira.

At the end of January, the US dollar rose just with the announcement by the Federal Reserve Bank (FED) that it would begin a series of consistent and significant rate hikes. Meanwhile, the euro has lost another 10 percent of its value.

The European Central Bank (ECB) could raise interest rates by 0.25% this month, but the Fed raised its benchmark interest rate by 0.75 in June, the most significant increase in nearly 30 years.

“The United States is raising interest rates much more aggressively than the ECB can do now or in the near future,” Sarno said.

ECB dilemma

In addition, raising interest rates may be the “first step” for the euro to recover, but the ECB is facing financial difficulties, he said.

“The ECB is caught in a worse dilemma that central banks may face. On the one hand, inflation is skyrocketing and interest rates need to be raised. On the other hand, eurozone growth is poor and low. You will benefit from interest rates, “said Sarno.

“After all, the depreciation of the euro has exacerbated the inflation problem by importing more inflation due to the weaker euro. About half of the euro’s imports are being billed in dollars. Therefore, a pass-through from a weak euro to high inflation is inevitable, as more euros will be required to pay for these imports. “

Therefore, consumers can expect even higher prices. Above all, energy and raw material costs can rise as the situation normalizes. “Growth is needed to prevent rising living costs by undermining the purchasing power of individual households. Fiscal policy is the only solution,” Malik said.

He added that the only potential upside in the euro’s depreciation is the possibility of a surge in demand due to exchange rates, and therefore in some European countries, economic slowdowns could at least slow down. ..

“A weak euro could benefit eurozone exports, especially for Germany and France. Germany was already enjoying a high current account surplus. A weak euro should improve their competitiveness.”

Source: Al Jazeera

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