Depreciation of euro and its impact

FE Team | Published: March 17, 2015 00:00:00 | Updated: November 30, 2026 06:01:00

Nineteen EU member states have adopted euro as a common currency. Of them, Greece, Spain, Cyprus and Ireland have been suffering from debt crisis since 2007-08 global financial crisis. Although EU member states created the European Financial Stability Facility (EFSF) in 2010 and the European Financial Stabilisation Mechanism (EFMS) in 2011 for providing assistance to eurozone countries in difficulty, these had a very short-term effect and failed to restore the financial strength of those countries. As anti-austerity left-wing Syriza has won the recent elections in Greece, the volatility of Euro increased bringing difficulty in bailout negotiations. On March 11, 2015, EURO/USD exchange rate sank to its lowest in 12 years, i.e., $1.057 for 1.0 euro. US central bank increased the interest rate which also left a negative effect on Euro. Again, US stock market tumbled as dollar gained amid interest rate concerns. The foreign investors always invest in those countries where political risks are low but the return is high. Therefore, demand for dollar is climbing.
Depreciation of euro has some positive effects. The tourism sector of Greece and Italy that was badly hit by financial crisis in 2007-2008, will get the benefits of depreciation. Because it cost less for tourists of USA and some other countries due to downturn of euro, demand for the goods of eurozone will go up which will help revive tourism and other sectors. This will continue until demand and supply situation of US dollar and euro reaches an equilibrium.
Eurozone exporters are the worst victims of the volatile situation. When they convert euro into dollar, they get less and this is known as foreign exchange risk. The opposite has happened for the importers, as they have to pay less in conversion. Bangladesh mainly uses four major currencies, such as US$, Japanese Yen, Euro and GB Pound Sterling. Therefore, our exporters will face foreign exchange risk when they deal with vacillating currencies.
Shahariar Absar shahariar_dufin15@yahoo.com