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Dollar-Euro Parity: Europe Pays for Its Mistakes

The main headline on the New York Times website on July 16 was puzzling: “The World Economy Is Imperiled,” it said, “by a Force Hiding in Plain Sight.”

So what is the danger?

In recent years, we have become accustomed to seeing the destruction of the world behind every event. From the rapid economic development of China and the unprecedented modernization of its armed forces, to, of course, the pandemic and the war in Ukraine.

However, the Times headline, as I noted, while alarming, is nevertheless not revealing.

One must read further to find out what is threatening the global economy.

The global economy, therefore, is at risk from the high price of the dollar, the author writes.

I do not intend to get into the technical side of the hugely important subject of currency correlations. And you don’t need to be an expert on this subject to know the importance of the value of the dollar compared to other currencies for each of our wallets.

But I will make a brief historical reference:

After the establishment of the euro, in 2000, and for two years the U.S. dollar had more value than the euro.

But after 2002, the euro gained the upper hand and was trading at 1.60 to the dollar.

This year, the euro has lost about 10% of its value against the dollar and in recent days has reached a practical parity of $1 to 1 euro.

This, in short, means that our vacations in Greece, as well as the Greek products we buy in the U.S., are cheaper than last year.

The opposite is true for Greek vacations in the U.S. and for the purchase of American products.

The Nobel laureate economist Paul Krugman gives a revealing explanation to the question of why the dollar reached parity with the euro in his July 15 article in the Times: “not interest rates, but a major downward revision in investors’ views of European competitiveness, and hence of the perceived long-run sustainable value of Europe’s currency.”

Many of us saw the weakening of Europe’s competitiveness and sounded the alarm. Unfortunately, it seems that one cannot have both a high quality of life and a competitive economy.

In addition, Krugman also writes the following:

“It’s a bit simplified, but not that far from the truth, to say that over the past couple of decades Europe — especially Germany, the core of the Continent’s economy — has tried to build prosperity on two pillars: cheap natural gas from Russia and, to a lesser extent, exports of manufactured goods to China.

“One of these pillars is completely gone, thanks to Vladimir Putin’s bungled invasion of Ukraine. The other pillar is crumbling, as the Chinese economy stumbles, partly because of erratic policies in the face of COVID-19, and also as Chinese human rights violations make dealing with its regime increasingly toxic.

“…leaders — especially in Germany — refused to acknowledge that the problem with autocratic regimes isn’t just that they do evil things, it is that they aren’t trustworthy. Europe is now paying the price for that willful blindness, and the weak euro is a symptom of that price.”

However, something similar is also true in matters of foreign policy with authoritarian regimes, as in the case of Turkey.

No one can rely on them, because they are not reliable.


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