That strong euro is not so bad

On the world market, 1 barrel of oil currently costs 27% more than in June 2017. The price has risen from approximately $48 per barrel to approximately $61 per barrel. However, expressed in euros, the price increase of black gold is only half (15%). The reason for this is that the euro has since strengthened against the US dollar.

This favorable effect of the strong euro is also noticeable at the pump. Did you pay about € 1 for 1,28 liter of diesel in June, now that is (despite the mentioned increase of the oil price) only €1,33. In short: that is only less than 4% more.

Indirect benefit
The advantage of the strong euro does not stop at the virtually unchanged price of diesel. There is also a large indirect advantage to be discovered. Had the euro remained unchanged (versus the dollar) in recent months, inflation in the eurozone would most likely have been plausibly higher in recent months. 

The expectations of the European Central Bank (ECB) for the coming years would also probably have been higher. This is very important because the inflation expectations of the ECB (2 years ahead) are decisive for the monetary stance of the bank.

Buying bonds
Had the euro remained unchanged in value, the expectation would have arisen that the ECB would stop buying government and corporate bonds earlier than expected (end of this year). And that the bank would start with interest rate hikes relatively early in 2019. In anticipation of this, interest rates had risen, with all the associated consequences for the monthly interest charges of entrepreneurs who had taken out a loan (at variable interest).

Headwinds for exporters
Of course, the strong euro is causing some headwinds for our exporters, but that's something we can deal with in the Netherlands. Before the arrival of the euro, we generally only knew that the value of our currency (the guilder) increased.

In view of the euro and the ongoing debate about whether that currency should be more like the German mark and the guilder or the Italian lira, I think the history is clear: a strong currency is better for our economy and our prosperity than a weak currency. And that is not only because a liter of diesel remains relatively cheap.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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