The risks of an appreciation of the euro

Where is the euro headed on the currency markets? Since mid-2012, our currency has gained no less than around 9% against the currencies of our 20 biggest trading partners - something that has raised a few eyebrows among forecasters given the lackluster growth in the euro zone and the ongoing debt crisis. It would appear that the market's trust in the future of the single currency has not evaporated after all. This is a very positive thing in principle. 

But the strong euro does not just have positive macroeconomic implications. To begin with the positive things nevertheless: appreciation makes imports from abroad cheaper. The drop in import prices that we are currently witnessing in the euro area is keeping a damper on general consumer price inflation, boosting income purchasing power. The fact that inflation was sitting at under 1% as against the previous year prompted the ECB to cut interest rates again in November 2013. But the other side of the appreciation coin is that it eats away at exporters' competitiveness and, in doing so, poses a particular risk to the progress made in the southern European countries as a result of cost savings. For companies that have set up production facilities abroad, this effect does not materialize. But for these companies, the depreciation of the national currencies in question translates into lower revenues and profits in their euro-based accounts. 

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