What is the impact of the weakened euro on the European economy?

Last year, the euro lost almost 15%, and the other day it reached parity with the US dollar. The minimum value of the EUR/USD pair was fixed at 0.9952.

There are several reasons for such a drop, but among the main ones are high inflation, fears about a recession, the ECB's inaction with an interest rate increase, as well as the energy crisis caused by the uncertainty of Russian gas supplies to Europe. 

How does the weakened euro affect the economy of the entire eurozone?

1. Europe pays the bills due to the conflict in Ukraine

Anti-Russian sanctions have led to the fact that it is Europe, not the United States, that «pays the bills.» Many European countries suffer from gas shortages, save on heating and hot water supply. As a result, the probability of a recession in European countries is higher than in the United States. And even if it comes both there and there, in Europe, the decline in the economy will be more serious and prolonged. 

Moreover, Europe relied on Russian gas to make its energy transition to «green» energy.

2. Inflationary impact of the weakening of the euro

The biggest problem currently facing the European economy is inflation. With a cheap euro, everything that is bought abroad becomes more expensive, that is, Europe imports inflation. Especially when the main part of inflation in Europe is associated with the rising cost of energy, food and raw materials in general.

3. The ECB's tasks are accumulating

However, the higher the inflation, the more tasks the European Central Bank has. The ECB probably hoped that the recession would make its task easier, since it would reduce consumption and investment and, therefore, help lower prices. But a weak euro may force the central bank to raise the rate more than it would like.

4. Export 

Some analysts believe that a weak euro helps exports or improves the assessment of the balance sheets of European companies abroad. However, these benefits are not comparable to the damage that inflation is doing to the European economy right now, and the fact that a weak euro makes inflation constant.