As US prepares to hike rates, Europe could reap benefits
A weaker euro means cheaper travel and shopping for tourists
FRANKFURT: In a high-stakes juncture for the global economy, the central banks of Europe and the United States are set to take opposing actions in December: the European Central Bank to cut rates, the Federal Reserve to raise them. For the struggling euro-zone, it can’t happen soon enough. The divergence between two of the biggest forces in the world economy has the effect of weakening the euro against the dollar, providing a valuable boost to economic growth in Europe at a time of mounting uncertainty. For the more solid US economy, it is creating an unwelcome headwind.
The euro has fallen against the dollar since the ECB signaled last month that on Dec 3 it would further trim interest rates or expand its monetary stimulus, both of which tend to weigh on a currency. At the same time, the Federal Reserve has been pushing the dollar higher by indicating it’s likely to raise rates on Dec 16 for the first time in nearly a decade. That “suggests the euro should be one of the weakest major currencies over time,” says Nick Bennenbroek, head of currency strategy at Wells Fargo Securities.
The euro’s drop is important because it has become a key driver of the moderate upswing in the economy of the 19-country euro-zone. In particular, it strengthens Germany, the largest member of the currency union. There, the economy relies on exports of autos by the likes of Daimler and BMW as well as industrial and factory equipment made by smaller companies. In a survey of 225 financial sector professionals published Tuesday, the ZEW research institute found that the lower euro had increased optimism over the future of the German economy.
The currency’s decline helps the region offset the slowdown in global trade with developing economies, particularly China. It doesn’t just benefit Germany: the country’s industrial companies spread the wealth by buying from suppliers in other European countries. And as companies do better and unemployment drops gradually, consumers are spending more.
Cheaper travel, shopping
A weaker euro also means cheaper travel and shopping for tourists, particularly Americans and Chinese, whose own currency is linked to the dollar and tend to splurge on luxury goods in Europe. Andreas Rees, chief German economist at UniCredit Research, says a 10 percent decline in the euro - weighted against major trading partners, not just the US - can boost GDP by 0.6-0.7 percent over 12 to 18 months. The trade-weighted euro has fallen 9 percent since shortly before the ECB unveiled its trillion-euro stimulus program in January. It has fallen 4 percent since Oct 22, when ECB President Mario Draghi indicated more rate cuts were on the way.
That would be a significant bonus for the euro-zone economy, which grew by a meager 0.3 percent in the third quarter compared with the quarter before. Unemployment is only slowly edging down from a high 10.8 percent. The inflation rate of 0.1 percent is so low it has awakened fears of long-term stagnation. — AP