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Chronicle of the Middle East and North Africa

The Euro’s Depreciation and its Implications for the MENA Region

Euro's Depreciation
Fifty euro banknotes on table. DENIS CHARLET / AFP

Ali Noureddine

This article was translated from Arabic.

For the first time since the introduction of euro in December 2002, the European single currency’s value has fallen below the one-dollar mark in recent weeks, a decrease unmatched in more than 20 years.

In essence, the euro fell behind the US dollar on many occasions in foreign markets throughout July of this year. Although it later recovered slightly to linger at levels either below or just above the dollar, it is undeniable that the European currency has lost roughly 12% of its value to the dollar since the beginning of 2022. To put this in context, it is presently battling to overtake the US dollar after the euro reached an all-time high of $1.6 in 2008.

However, the euro was not the only currency that fell precipitously against the US dollar in foreign markets. The yen’s exchange rate compared to the dollar fell to its lowest level in more than 24 years in July, amid fears that the Japanese currency would fall further in the following weeks unless the Bank of Japan changes its monetary policy fundamentally.

Furthermore, the pound sterling, which was trading around $1.37 in mid-January, has progressively declined in value to below $1.2. Even cryptocurrency markets experienced an extraordinary drop versus the US dollar. In other words, the dollar has risen not only against the euro but also against a basket of other currencies.

There are various causes for the dollar’s recent gain on international markets, and a “strong dollar” poses numerous threats to both emerging and established countries alike. However, the impact of the dollar’s quick increase versus other currencies, particularly the euro, varies widely across the Middle East and North Africa.

The extent to which each nation is affected is fully determined by the composition of its balance of payments, the quality of its exports and imports, and the extent to which its economy is tied to the economies of the Eurozone. As a consequence, each country’s response to these changes varies, as does the quality of the responses taken as a result.

The increase in US interests and the rise of the dollar against the euro

Several factors that have contributed to the dollar’s recent ascent have had an influence on most other currencies, particularly the euro. The first of these causes is the rise in interest rates in the United States as a byproduct of the Federal Reserve issuing three decisions in four months, each of which increased targeted interest rates in balanced ratios.

The most recent of these decisions, issued in mid-June, constituted the Federal Reserve’s greatest hike in interest rates in more than three decades. The decision specified that the target interest rate be raised by 0.75 percentage points to a range of 1.5 percent to 1.75 percent.

However, given the high level of inflation that the Fed is attempting to manage, most investors continue to predict decisions that need future hikes to the Fed’s target interest rate, which is expected to reach 3.4 percent by the end of the year.

The rise in interest rates in the United States cannot be isolated from the increase of the dollar against other currencies, particularly the euro. The hike in US interest rates will likely cause a flight of capital to the US market, as well as an increase in demand for the dollar.

This is why, in mid-June, the dollar made its greatest jump against other currencies following the announcement of the latest Federal Reserve decisions. The transfer of capital from other markets, such as the European market, to the United States due to the more appealing interest rates there naturally implies investors are selling the euro in the currency markets, which has led to the euro’s depreciation.

In such a situation, the European Central Bank is expected to raise targeted interest rates in order to halt capital flight to the United States and prevent the euro from dropping further. It should be highlighted that such a quick decrease in the value of the euro is likely to result in growing inflation and greater pressure on the European consumer.

Even if the European Central Bank attempts to make some limited increases in Europe’s targeted interest rates, it will be difficult to keep up with the rapid rise in US interest rates. The European market is currently suffering from the impacts of the Ukrainian war, which is putting severe stress on economic development. Any quick increase in interest rates would exacerbate the European economy’s vulnerabilities and push it into a severe and long-term recession.

The bottom line is that rising interest rates in the United States are one of the causes for the dollar’s gains against other currencies, such as the British pound, and against other investment assets, such as gold. Indeed, many analysts have observed a link between the rise in US interest rates, the attractiveness of the US market to capital, and the swift decline in cryptocurrency values.

Additionally, high returns on relatively secure assets in the US bond market have compelled some investors to liquidate their high-risk investment assets, such as those related to digital currencies.

The fall of the euro and the Ukraine crisis

The dollar’s increase against the euro came partly due to challenges in the European market, which prompted the euro exchange rate to fall in foreign markets. The Ukrainian war has limited natural gas supply to the European market, resulting in high energy costs and shortages, as well as restrictions on the growth of various industrial activity.

As a result, the spectre of an economic collapse proceeded to loom over Europe, raising concerns about the viability of its financial markets. As a result of the decrease in capital flow and investors’ concerns about the European Union’s circumstances, the euro became more vulnerable.

Furthermore, the high cost of energy and significant inflation that hit the European market resulted in a drop in consumption. This reduction reflected on the capacity of European markets to expand, thereby compounding the crisis.

It is projected that as autumn approaches, there will be an increase in demand for energy in the European Union to meet heating demands, driving up the price of natural gas and, by extension, electricity. These events will surely lead to an increase in inflation and prolong the economic crisis that the entire continent is experiencing.

As a consequence, the euro is projected to remain under pressure, particularly because procuring gasoline at present high prices will increase demand for the dollar, given Europe’s reliance on imports to secure these supplies.

Negative repercussions on some countries in the Middle East and North Africa

The quick ascent of the dollar and subsequent decrease in the value of the euro have had a variety of positive and negative ramifications in the Middle East and North African economies. The first projected negative result was a decrease in the value of remittances from European expatriates to the region’s nations.

This is especially true for nations like Egypt, the Maghreb countries, Lebanon, and Jordan, who regularly get considerable transfers from the European Union. Because expatriates’ earnings are denominated in euros, a fall in the value of the currency will inevitably translate into a decline in the value of the remittances they send home.

The effects of these developments on trade balances will differ depending on the nature of each country’s exports and imports. Morocco, in particular, is at the vanguard of the countries affected by these events, since commerce with the European Union accounts for almost 60% of its international trade, with exports to the European bloc totalling around $15 billion.

Moroccan analysts believe that the euro’s fall against the dollar will have a negative impact on Morocco’s economy because the nation is paid in euros for its exports to the European market, while the majority of its purchases from other countries (especially for gas, oil and wheat imports) are made in US dollars. As a result, it is projected that the euro’s depreciation against the dollar will raise the cost of imported products denominated in US dollars while decreasing the value of revenues from exports to the EU denominated in euros.

Naturally, this will exacerbate Morocco’s trade deficit as well as its balance of payments deficit, which has already seen a 25% increase in its balance of trade over the last year to more than $21.2 billion owing to the spike in worldwide oil prices.

With significant increases in oil prices and a drop in the value of the euro versus the dollar, this imbalance is anticipated to climb by another percentage point this year. Furthermore, Moroccan exports to Europe will be impacted not only by the devaluation of the euro, but also in terms of export volumes owing to the reduction in consumption rates in Europe as a result of the economic crisis there.

These developments are also expected to have a detrimental effect on Tunisia, Algeria, and Libya. Tunisia, which is already under tremendous economic strain, exports around $10.7 billion in goods to the EU each year, the bulk of which is priced and paid for in euros.

Algeria’s exports to the European Union amount to approximately $21.3 billion, while Libya’s exports hover around $19.6 billion. Similarly to Morocco, the value of these nations’ exports to the EU is anticipated to fall, whether owing to the depreciation of the euro – the accepted payment currency – or a drop in export volume as a result of Europe’s economic crisis.

Gulf countries benefit

So far, the Gulf Cooperation Council nations look to be the ones benefiting the most from euro’s fall. The majority of these states’ exports are oil and gas, which are priced and sold in US dollars. This situation not only protects their exports from the consequences of the depreciating euro, but it also allows them to cut their import expenses due to the decrease in the cost of items imported from the European Union, the majority of which are priced in euros. It should be emphasized that GCC states are the European Union’s fourth-largest export market, accounting for more than 100 billion euros in yearly exports.

Furthermore, the Gulf countries have active financial markets and stock exchanges that are open to global capital mobility. As a result, they, like the United States, will profit from capital fleeing the European Union as a result of low interest rates, the euro’s drop in value, and deteriorating economic conditions.

This is especially relevant given that, unlike the EU, the GCC nations swiftly raised their interest rates in response to the rise in US interest rates. Furthermore, the GCC markets and stock exchanges are tied to massive initiatives and profit from the money flows generated by oil exports.

The euro depreciation, like any unanticipated economic development, includes advantages and downsides that differ by country. The value of Moroccan, Algerian, Tunisian, and Libyan exports to the European Union is guaranteed to fall, placing severe hardship on these countries’ economies.

In contrast, GCC nations will likely see these events as an opportunity to attract international capital and lower import costs. Said nations must closely watch major changes in international markets in order to adjust their fiscal and monetary policies to meet emerging challenges.

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