On 1 January 2015 Lithuania joined the euro zone and for the first time since April 1992 all three Baltic countries again share the same currency.
Lithuania’s choice to join is highly logical, given its strong trade links with other euro zone countries, not least the other Baltic ones.
But what to expect from the euro in 2015? The euro has weakened against most currencies in 2014, notably against the dollar, see the not-too-reader-friendly Figure 1, from some 1.37 USD per EUR at the beginning of 2014 to some 1.20 USD per EUR at the end of 2014, i.e. the euro has depreciated by about 10% against the dollar.
Figure 1: USD per EUR, 1 January 2014 – 5 January 2015
Source: European Central Bank
Reason for concern? No. a) It is a return to its average value against the dollar, see Figure 2. The euro has possibly been too strong vis-à-vis the dollar and this is now being corrected, b) it reflects a stronger American economy where interest rates may rise this year, which strengthens the dollar and, c) it is a deliberate move from the European Central Bank since a weaker euro at the moment may help to solve two problems for the euro zone: Too low inflation and too little growth.
Figure 2: USD per EUR, 1 January 1999 – 5 January 2015
Source: European Central Bank
The primary goal of the euro zone is price stability, defined very precisely as “close to but below 2% in the medium term”. The euro zone is actually missing this target quite substantially at the moment, see Figure 3, with inflation being less than half a percent.
Figure 3: Inflation rate in the euro zone
Source: European Central Bank
Higher inflation is mildly annoying for you and me but it is good for firms in two ways: They can sell goods at higher prices and it lowers their real cost of borrowing (with higher prices for their goods and services it becomes easier to service a loan at a certain interest rate) and this should help investment in the euro zone, which is very much needed to help stimulate ailing growth.
A weaker euro makes imported goods more expensive and thus adds to inflation. And a bit higher inflation, as just mentioned, should help investments in the euro zone, too.
The effects on us consumers will be very mild, even trivial. We will have slightly higher inflation and it may be a bit annoying to visit e.g. the USA (but it has been cheap to do so for quite a while with a strong euro and a weak dollar) – but it will be close to trivial since we are not talking currency movements of Russian proportions…. It is all reasonably much under control. Thus, expect that the European Central Bank on 22 January may take measures to weaken the euro a bit more. But nothing overly dramatic and that is exactly what we want.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga
Komentāri (30)
apmulsis 06.01.2015. 22.39
It seems very interesting.
Review: “Forgotten Depression” worth remembering
“The central irony of financial crisis is that while it is caused by too much confidence, too much lending and too much spending, it can only be resolved with more confidence, more lending and more spending.”
http://blogs.reuters.com/breakingviews/2014/12/12/review-forgotten-depression-worth-remembering/
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apmulsis 06.01.2015. 22.39
It seems very interesting.
Review: “Forgotten Depression” worth remembering
“The central irony of financial crisis is that while it is caused by too much confidence, too much lending and too much spending, it can only be resolved with more confidence, more lending and more spending.”
http://blogs.reuters.com/breakingviews/2014/12/12/review-forgotten-depression-worth-remembering/
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yndi halda 06.01.2015. 18.10
“They can sell goods at higher prices and it lowers their real cost of borrowing (with higher prices for their goods and services it becomes easier to service a loan at a certain interest rate)”
What about expenses? If office space or electricity prices grow just as fast as those of goods the companies sell profits don’t increase and all that’s left are peevish customers.
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@Morten Hansen > yndi halda 06.01.2015. 19.01
All other things equal it still makes it easier to service a loan. Also why many fear deflation, i.e. declining prices – then firms will have to service loans based on lower prices for their goods and that can be very tough and will therefore lead to less investment , which is what we don’t want.
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