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The Euro Financial Crisis’ Affect on International Trade

May 20, 2010

The Greek Financial crisis has caused the euro to depreciate, hitting a four year low against the dollar on Wednesday at € 1 = $1.2146.  This represents a fall of about 15% since January 1.  Besides American tourists visiting Europe, this decrease will benefit European firms that export to the rest of the world, since their products are now cheaper as well.  For instance, imagine that it costs a German company €100 to make a widget and export it to the U.S., that widget would have cost about $144 at the beginning of 2010.  However, while that widget would still cost €100 to be produced in Germany, it can now be sold in the U.S. for $1.21, but the Germany firm would still reap the €100.

Thus, European exports to countries that do not use the euro should be expected to increase in the near future.  By giving up the drachma and accepting the euro, Greece lost the ability to unilaterally depreciate its currency to reap this injection into its tourism and export sectors.  While the Greek economy may benefit from the declining euro, it will be minimized since more than half of Greece’s exports go to other countries that use the euro.  Similarly, Greece’s tourism sector will receive a smaller boast, since about half of all tourists that visit Greece also come euro member states.

The countries that will benefit from the fall of the Euro are those that already have very competitive export sectors, such as Germany, which is the third largest exporter in the world.  However, for large multinationals that own factories in the Eurozone and the U.S., the blessing is mixed as American exports to countries using the euro are now more expensive.  In addition, firms crave stability, and this rapid depreciation is not stable and can cause havoc for smaller firms (see “Euro Zone Likes a Weaker Currency, Up to a Point”).

The depreciating euro causes another headache for the U.S. with China.  According to The New York Times, China had decided to allow its currency, the renminbi (yuan) to float against the dollar in April, but has since reversed course. Firstly, the yuan has risen about 14.5% against the euro since the beginning of the year.  This means that that China’s exports to Europe are now more expensive, and sales by Chinese firms will fall in Europe.  Secondly, China holds huge euro reserves, and its failing value has caused the country to lose “tens of billions of dollars.”  As a result, China may now play it safe by keeping the renminbi pegged to the dollar.  Many American politicians had been pushing for the yuan to float against the dollar, as it is expected that the value of the yuan will increase, decreasing the American trade deficit with China.

As a result, the Greek financial crisis has caused ripple affect s across the world, complicating world change for many of the major players, such as Germany, China, and the U.S.

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