Weakening euro mixed bag for Italy, key imports expected to see prices rise

Source:Xinhua Published: 2015-3-10 11:10:20

The euro's dramatic slide against the US dollar and other world currencies should be good news for the Italian economy, attracting more non-European tourists and lowering the prices for Italian experts. But a closer look at the numbers reveals some worrying aspects as well.

The euro currency has lost a little less a quarter of its value against the dollar over the last year, from a recent peak of $1.395 per euro on March 9, 2014 to an inter-day low of $1.058 per euro exactly a year later, on Monday.

Monday's trading levels represent the lowest point for the euro since 2003, less than 18 months after the currency formally replaced Italy's lira, along with the German mark, the French franc, and other European currencies.

The euro has also lost significant ground to other major world currencies, including China's renminbi, the British pound, the Swiss franc, and Japan's yen. Among leading currencies, only Russia's ruble has fallen more or less in step with the euro.

On the surface, such a trend should be good news for Italy's slow-growing economy because it makes it cheaper for consumers outside the 19-member euro zone to buy Italian made goods and for people from those countries to travel in Italy.

But because key raw materials, most significantly oil and natural gas, are priced in dollars, they become more expensive.

"Fortunately, oil and gas prices have fallen as well, and so there hasn't been a rise in fuel prices in the euro zone," Andrea Giuricin, from the Bruno Leoni think tank, told Xinhua.

"But other countries where the currency is more stable are benefiting from low oil prices and in the euro zone the impact is reduced. And if oil prices suddenly surge, it will be a double blow for Italy," said the expert.

Another problem involves imports.

While the weak currency makes it easier for foreign consumers to buy Italian goods, it makes it harder for Italians to buy goods from other countries with stronger currencies, including China and the United States, which, excluding fuel purchases, are Italy's two largest trading partners outside the euro zone.

"For industries that import from China, the US, and some other countries, the weak euro is bad news," Giuricin said.

The yield on the benchmark 10-year Italian government bonds at the close of trading Monday was a microscopic 1.28 percent, very good news for Italy, which benefits from low borrowing costs.

But according to Oliviero Fiorini, an analyst with ABS Securities, sustained erosion in the euro's value could also drive government bond yields higher.

"A year ago, Italy's 10-year bonds had a yield of 3 percent," Fiorini told Xinhua. "So they earned 3 percent and saw the euro lose 20 or 25 percent. If investors have to start taking currency risk into account with Italian debt, it will eventually push yields higher."

But there is one potential silver lining to the euro's drop in value, behind the export and tourism sector: inflation.

Italy and a handful of other euro zone countries are at risk of sustained deflation, with overall prices falling. That is bad news for companies and for the government, which would have a harder time paying down debt. The weak currency makes that much less likely, according to Franco Bruni, an economist with Bocconi University in Milan.

"One reason the European Central Bank engineered the drop in the currency is as a tool against deflation," Bruni said in an interview. "The overall impacts may be mixed, but deflation would be a disaster. It is worth taking significant steps to avoid it."

Posted in: Europe, Economy

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