As the global economy continues to see a variety of disruptions, the euro is approaching parity with the dollar for the first time in 20 years.
The euro was established by the European Union as its official currency in 1999. For most of the past two decades, exchange rates have been near or above $1.10 per euro on the foreign exchange market — meaning that Americans seeking to acquire euros needed to provide a greater share of dollars than euros they received.
Over the past year, however, the exchange rate has quickly dropped from $1.22 per euro to $1.02 per euro, according to Bloomberg Markets. The phenomenon implies more favorable conditions for Americans seeking to conduct business or travel in European countries that use the currency.
“We are partly observing a return to a longer run trend, which began in the summer of 2008, where the euro gradually depreciates against the dollar,” William Luther, the director of the Sound Money Project at the American Institute for Economic Research, told The Daily Wire. “That trend was interrupted by the pandemic, with the euro appreciating considerably throughout much of 2020 before reversing course in January 2021 and returning to its pre-pandemic level by March 2022.”
The most recent drop in demand for euros is due to the Russian invasion of Ukraine, which led to higher natural gas prices and reduced production throughout Europe. “Barring any further calamities, the exchange rate will likely return to its pre-pandemic trajectory as Europe’s energy problem wanes,” Luther, who also works as an economics professor at Florida Atlantic University, added.
Indeed, energy prices have risen across Europe as supply from Russia is threatened. Citizens of Germany, for example, are purchasing gas at $7.27 per gallon as of July 4. In Spain and France, prices at the pump are $8.23 and $8.00, respectively. Prices are especially high in Scandinavia — $8.47 in Sweden, $9.50 in Finland, $9.48 in Denmark, and $9.75 in Norway.
Many countries are receiving less than half of their usual volumes of natural gas from Russian state-backed company Gazprom, according to Reuters. German gas importer Uniper recently requested that the nation’s government provide a $2 billion loan amid reduced energy supply from Russia, German state-run news outlet Deutsche Welle reported on Friday. Economy minister Robert Habeck affirmed that the government “will not allow a systemically important company to go bankrupt and cause turbulence on the global energy market as a result.”
Rising energy prices are complicating the battle against high inflation in the United States and the European Union. Because inflationary pressures in Europe are more strongly driven by “real supply disturbances,” Luther said that the higher price levels are “more excusable” across the pond. Both American and European policymakers, however, “have done little to counter rapidly rising prices” until recently, he added.
“The European Central Bank cannot do much to increase the supply of natural gas. The situation is very different in America, where much of the inflation experienced over the last year was due to easy monetary policy,” Luther explained. “The Federal Reserve could have — and should have — offset the surge in nominal spending observed over the last year. If it had, prices would be lower in the U.S. and in Europe today.”
The Federal Reserve’s benchmark interest rate is now pegged between 1.5% and 1.75%, while the European Central Bank has a negative interest rate that policymakers hope to bring above 0% by September. Both central banks have a long-term inflation goal of 2%, although inflation rates in both the United States and Europe are increasing above 8%.