By Eric J. Lyman
The euro currency has continued its slide against the U.S. dollar so far in 2016, and in recent weeks some major banks on both sides of the Atlantic predicting parity for the two currencies in the coming months.
But while weakness for the euro has been one of the main factors behind Italy’s recent economic stability, economists say continued weakness would not be all good news for Italy.
In recent days, New York-based Goldman Sachs adjusted its forecasts for the euro’s value compared to the dollar, predicting on January 22 it will cost less than a dollar to buy a euro by the end of this year. In Europe, German banking giant Commerzbank predicted the two currencies would have the same value by the end of the year.
At the end of the trading on Friday, it took 1.08 U.S. dollars to buy one euro. That is compared to 1.28 U.S. dollars per euro at the start of 2015, and 1.39 U.S. dollars per euro two years ago.
Italy’s economy grew in all four economic quarters last year — the first time that has happened since 2008 — and the trend is forecast to continue this year. To be sure, the weak euro, combined with low oil prices, were the key reasons the troubled Italian economy began to turn around, reducing the price of Italian exports and making the country a more attractive destination for tourists.
If the euro continues to weaken, it would continue to help exports, though Giuseppe De Arcangelis, an economist with Rome’s La Sapienza University, said the high-end nature of many Italian exports would likely limited those benefits.
But De Arcangelis and other experts said an array of negative factors could also emerge, ranging from a risk of inflation to the likelihood that Italian businesses and property could get gobbled up by foreign buyers using a stronger currency and the possibility that positive economic signals could make it easier for the government to lay off important structural reforms to the increased cost for Italians to travel abroad.
“Continued weakness for the euro would be a mixed bag for Italy,” said De Arcangelis.
“But the key factor is the price of oil. If oil prices stay low, a weak euro would present some risks but the impact on the cost of imports would be muted because the most important import is oil.”
“If the euro continues to weaken and the price of oil starts to rise, that would be a blow,” the economist said.
Franco Bruni, a monetary policy professor with Milan’s Bocconi University, said the biggest impact of long-term weakness for the euro could be the Italian companies becoming takeover targets.
“Italy would become cheaper for the rest of the world,” Bruni said in an interview. “Aside from that, an Italian traveling to New York, for example, will have to pay more for a steak dinner or a hotel room.”
De Arcangelis noted that even if Italian companies are taken over, it wouldn’t necessarily have an impact on Italian growth.
“If a foreign company buys an Italian company and invests money and makes it more efficient and competitive, the overall economy still benefits,” he said.
For his part, Bruni thinks the worries of a long-term weakness for the euro may be overblown. He said he’s not sure the trend of the last two years will continue much longer.
“I’m a bit of a contrarian, but the U.S. Federal Reserve is raising interest rates and there is a risk of a new economic slowdown there as well,” Bruni said.
“I think we might actually see the euro gain a little ground by the end of the year,” he added. Enditem