The Pros and Cons of a Weak Euro

The lingering Eurozone crisis and uncertainty following Brexit has brought with it a decline in the value of the euro vs. the U.S. dollar. With the economic situation in Europe still shaky, the European Central Bank (ECB) initiated a strategy of quantitative easing to spur growth.

At the same time, while the sovereign debt crisis in Greece has ended, problems in several European nations have not altogether gone away, and governments have considered exiting the euro currency, following Britain's lead. All of these things are likely to keep the euro low for some time to come, and as with most things, there will be winners and losers in the U.S. economy.

Here, we look at the winners and losers of a weaker euro.

The Winners 

Importers of European goods

Companies that use European parts as inputs will find their supply chains becoming more affordable. Transportation companies that purchase European cars and trucks will benefit by adding to their fleet at a reduced cost. Similarly, airlines that buy their planes from Airbus or other European aircraft manufacturers will do so at better-than-usual prices. This can help boost profit margins for these firms.

U.S. Consumers

American consumers will find that imported consumables, such as fine wines and cheeses from France and Italy, have become more affordable. German cars, including Audi, Mercedes-Benz, BMW, and Volkswagen, will all become less expensive at showrooms in the U.S.

Investors in European Companies that Do Big Business in the U.S.

American investors are able to buy shares of foreign companies through ADRs which are listed on U.S. stock exchanges. European ADRs of companies that have a large presence in the U.S. may benefit by increasing sales here. Bayer, the German producer of over-the-counter drugs, for instance, reports that a 1% depreciation of the euro could increase company sales by €350 million according to its 2020 annual report. Similarly, chemical manufacturer BASF forecasts an extra €40 million in earnings for every one cent that the euro drops.

Tourists and travelers to Europe

When the euro is weak, it means the dollar must be strong relatively speaking. Tourists and business travelers will see their dollar go farther while abroad. U.S. companies who regularly send employees to Europe for business will also benefit from cheaper accommodations. Ex-pats who live in European cities but earn dollars will also see their cost of living go down.

The Losers 

Exporters to Europe

U.S. companies that export to Europe will lose out as their products become more expensive for European buyers. Companies such as beverage bottler Coca-Cola European Partners (CCEP), tobacco companies like Philip Morris (PM), fast-food chains including McDonald's (MCD), and consumer electronics and appliance producers like Harman International all rely on sales to European customers as a large portion of their annual revenues. These companies may see their profitability suffer as a result. Investors in domestic companies that have large exposure to the European market should be wary.

The U.S. Tourism Industry

Tourism may suffer as American destinations become more expensive for European citizens. While it is true that the industry has reported fewer European travelers visiting the U.S. each year for the past few years, tourists from other parts of the world such as Asia and South America have reduced the negative impact of fewer Europeans. Ex-pats from Europe living in America but earning euros will see their cost of living increase.

The Bottom Line

The weakening of the euro against the dollar has created both winners and losers in America, and there is potential that the euro value may continue to slide. While importers and consumers of European goods will benefit, U.S. exporters to Europe will lose out. U.S. travelers to Europe will find that their dollar goes further, but Europeans may avoid traveling to America as their euros will buy less. Domestic companies that do a large amount of business in Europe will experience lower profitability for their investors, while European companies that do big business in America may see rising share prices.