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Bruegel: What is the significance of the euro reaching parity with the dollar?

Jul 14, 2022 , , ,

Brussels, 14 July 2022

The euro was last at parity with the dollar 20 years ago, in November 2002. So, this is an event of some economic significance and not representative of the euro’s value relative to the dollar. The US and euro-area monetary policy cycles are not in sync currently, with US rates rising much faster than in the euro area, thus boosting the value of the dollar. Therefore, this process has been driven primarily by the dollar appreciating, rather than the euro falling.

Irrespective of the reasons that have led to parity, has the euro area lost competitiveness?

While the nominal effective exchange rate has reached uncharacteristically low levels, the effective exchange rate, which is a measure of competitiveness, has not. In fact, the levels now are only cyclically lower from a very stable trend since before the financial crisis. So, the level of competitiveness in the euro area has not reduced in ways that indicate a structural loss of competitiveness.

Should the exchange rate be the target of policymakers?
The relative value of any currency is an outcome rather than a policy target. In that respect, a robust economy will also lead to a strong currency. Keeping the currency artificially strong is neither sustainable nor desirable. The euro today is only a distant second reserve currency globally. By distant, I mean that while the dollar represents about 60% of global reserves, the euro represents no more 20%. In an era of increasing geopolitical significance, the EU needs to identify ways of exerting influence. If a strong currency is one way of doing that, the EU must necessarily find ways of increasing the euro’s attractiveness abroad. To that it needs to increase the attractiveness of its economy.

Maria Demertzis is the interim director of Bruegel.

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