How the deflation of the Euro is affecting export

Consequences of the deflation

This is an analysis made by Grifoll. Please do not hesitate to comment on our Linkedin Company Page or Twitter.

As of March 9 the ECB has begun buying government bonds massively. This action goes in line with the plan to change the deflationary trend within the European economies. It is estimated that the total bonds purchasing amounts to 60,000 million a month, aiming to revive the economy and create new jobs. This happens when a new low in the euro / dollar is striking at $ 1.088 per euro. Is there a connection between these two factors?

Currently most countries set their import prices in dollars. This means that a buyer whose currency has fallen and must buy outside is paying more for the same as before. However, if you purchase your goods or services in Europe you will be buying with a more competitive price by comparison. In this sense, euro and dollar equating is advantageous for the EU.

However, if we take Spain as an example, 70% of exports are made within the European Union, where the euro / dollar fluctuations do not affect prices as euro happens to be the common currency. This means that only 30% of exports are benefited by the depreciation of the euro.

In order to manufacture the products that will be sold abroad -Europe needs energy. And energy is the Achilles’ Heel of Europe, one of its most scarce goods and therefore one of its major imports. For the time being the loss of value of the Euro coincides with a dramatic drop in fuel prices. This creates a situation in which these two factors cancel each other and European competitiveness is maintained within the global market.

Hence the ECB’s decision to buy government bonds and inject cash in the European economies. The estimation is that five years from now the oil price will have returned to the level of 2013, twice as much as today’s. Nothing indicates that the European economy will grow at the same rate, meaning Europe will have a weaker currency for a more expensive energy, with the consequent loss of competitiveness. If ECB’s money helps growth this situation might be avoided.

The Problem of Mid-Term Planning

Because future is uncertain, there are many companies taking a huge risk by signing cooperation or supplying agreements for two, three or five years duration. It is very likely that the rise in fuel prices will make these projects cease to be profitable (or even bearable) in the mid-term. This shift in European monetary policy, which leaves behind the austerity of the past seven years, is an investment that gives new weapons for companies tackling future decisions.

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Mateo Hilderink
Mateo Hilderink

Generating opportunities for Grifoll since 2013. Specialist in promotional product and loyalty campaigns.

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