The pain inflicted by a weak euro − John Cassar White

The European Central Bank would typically welcome the euro’s weakening as it would help the export-reliant EU be more attractive to non-EU importers. For a long time, the ECB struggled to fight deflation after not hitting the magic two per cent inflation target.

Things have changed rapidly over the past two years. The euro has depreciated by 13 per cent since the beginning of 2021, and inflation is fast approaching double figures growth. The ECB has repeatedly said it does not target the exchange rate. Still, as the euro is fast approaching parity with the US dollar, things may be getting so disorderly that direct currency intervention – an extremely rare event – cannot be ruled out.

There are various reasons for the weakening of the euro. The more determined attitude of the Federal Reserve in using monetary policy to tackle rising inflation contrasts with the wait-and-see stance of the ECB. Admittedly, the EU economies are weaker than that of the US. Raising interest rates at this stage of slugging growth in the Union comes with substantial risks. Moreover, despite the Biden administration’s falling popularity, the US is perceived by investors to be more politically stable.