A Mini-Economic Forecast of the Recent Drop of the Euro Currency

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A Mini-Economic Forecast of the Recent Drop of the Euro Currency

Introduction

In the recent past the euro has witnessed a relentless decline in value to the lowest point in four years. The decline is associated bailout that was undertaken by governments in the euro zone during the financial crisis. The countries borrowed heavily from their banks to safeguard them from the imminent crumple. The recent drop in the euro is an obvious indicator of the poor economic performance of the euro zone. Many countries across the world were badly affected during the financial crisis; the smaller economies were the worst hit. This prompted the formulation and implementation of strategies to overcome the crisis. So far most countries in the EU block have done well to avert the worst effects of the crisis. However, Greece is yet to free itself and analysts are pointing to its poor economic performance as a major factor in the recent drop of the euro.

The economic implications of the slumping euro

There has been mixed reactions as a result of the drop, while politicians still maintain that the drop is bad for Europe, big companies are reaping benefits from exports. Firms such as Daimler, Airbus and Pernod have registered increased earnings as a result of the slump in the euro currency. For instance a drop of 10% increases Airbus SASs profit margin by a billion euro. The French Aircraft manufacturing company transacts it business in dollars is to recover the losses accrued in 2008 as a result all time high value of the euro. The story is the same for Daimler and other companies who export goods to markets like China and the USA. Companies executives across the EU are happy that the drop will help them out of the snags that rose due to the implementation of restrictive monetary policies in China. However, the benefits may not be registered soon due to the hedging policy that required companies to formulate a framework for managing foreign currency risks.

For along time now Europe has relied on exports to lift itself out of financial troubles. In the last quarter of 2009 a 1.9% increase in exports was witnessed, this totalled to 838billion euro. Companies will likely to take advantage of the massive opportunities in markets such as China and the US to bolster their revenues.

The slump might be terrible for companies whose business transactions are primarily confined to the 16 country block, particularly for those that use the euro solely for import and export activities. Furthermore, the euros decline is decreasing the purchasing power for imported goods. Analysts are worried that the decline could get to parity levels with the dollar and spell economic doom for Europe. However a slow drop will mean economic boom rather doom for the EU. With a diminished euro, hotels could earn more from increased tourist arrivals attracted by the decline. Light manufacturing firms which deal in products such as shoes and textiles among others will have their exports boosted by the weak euro. In effect, countries such as Italy that deal in lower valued goods will reap benefits from the export boost though this may affect others such as Germany whose products are mostly quality driven.

Conclusion

The slump will have mixed effects for the euro zone economy but this will depend on the strategies that will be used by the specific countries. However, the best solution for the block is a comprehensive structural reforms to tackle its financial woes ones and for all.

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