Effects of a stronger Euro on the Eurozone

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Evaluate the effects of a stronger € on the Euro zone

Most countries, in fact all countries in the Euro zone, have adopted a floating exchange rate, which means that the value of the Euro and, thus, the exchange rate are only determined by the demand for and supply of the currency on the foreign exchange market. Therefore, the value of the Euro can fluctuate drastically depending on different factors. At the moment, the Euro is a very strong currency. This has got different effects on the Euro zone, positive as well as negative.

On the one hand, a strong Euro and, therefore, a high exchange rate decrease the price of imports into the Euro zone, so that more goods and services can be imported for the same amount of money, as one unit of currency will buy more units of foreign currencies than before, which means that more foreign goods and services can be imported. These imports might include services such as foreign travel, products we can directly consume, such as clothes from China or primary resources which are bought by firms. When producers can buy cheaper resources, their costs of production decrease, which causes prices to decrease, too, as the following diagram shows:

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Here, the supply curve shifts to the right, due to lower costs of production. This is a shift along the demand curve and therefore, the quantity demanded increases, whereas the price at which the goods and services can be purchased falls.

A decrease in prices is - obviously - good for the consumers, as they have to pay less money for the goods they buy, and it is also good for the government because low prices reduce inflationary pressure.

However, although the greater amount of imports is ...

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