The European Central Bank would typically welcome the euro’s weakening as it would help the export-reliant EU be more attractive to non-EU importers. For a long time, the ECB struggled to fight deflation after not hitting the magic two per cent inflation target.

Things have changed rapidly over the past two years. The euro has depreciated by 13 per cent since the beginning of 2021, and inflation is fast approaching double figures growth. The ECB has repeatedly said it does not target the exchange rate. Still, as the euro is fast approaching parity with the US dollar, things may be getting so disorderly that direct currency intervention – an extremely rare event – cannot be ruled out.

There are various reasons for the weakening of the euro. The more determined attitude of the Federal Reserve in using monetary policy to tackle rising inflation contrasts with the wait-and-see stance of the ECB. Admittedly, the EU economies are weaker than that of the US. Raising interest rates at this stage of slugging growth in the Union comes with substantial risks. Moreover, despite the Biden administration’s falling popularity, the US is perceived by investors to be more politically stable. This helps sentiment in favour of the US dollar.

A second crucial factor is the strength of the US economy in its recovery from the pandemic compared to the eurozone. The Ukraine war is making the growth prospects of EU economies more uncertain due to the proximity of the conflict zone to the Union’s borders and the much greater dependence of European economies on Russian energy supplies.   

So the US dollar continues to power forward as investors seek risk protection from the safe-haven greenback. Many foreign exchange investors believe that the euro may hit parity with the dollar in the coming months. As the Ukraine crisis intensifies, the stagflation risks in the eurozone increase. This may delay meaningful policy normalisation by the ECB.

George Saravelos, Deutsche Bank’s head of global currency strategy, argues that the ECB should intervene in the Euro-USD market. He argues that the euro depreciation is already inflicting economic damage via the import price channel.

The euro has depreciated by 13 per cent since the beginning of 2021 and inflation is fast approaching double figures growth

He said: “The single most efficient way to ease inflationary pressures in the eurozone at the moment is via a stronger euro. The more oil and natural gas push higher, the more euro drops, pushing commodities priced in euros even higher – a vicious inflationary spiral.”

The ECB is unlikely to get involved in the foreign exchange market to achieve this aim unless the euro falls to parity versus the dollar – an almost further eight per cent drop. The next best thing would be to start raising interest rates in line with what the Federal Reserve and the Bank of England are doing.

The pains inflicted by a weak euro are significant and affect all EU member states, albeit in different measures. Most of our imports, especially fuel and food items, are priced in US dollars. Even when we import goods from the EU, the inflationary impact of a weak dollar on producers’ costs will have to be borne by importing countries.

While our tourism comes mainly from Europe, rising inflation in all member states is bound to reduce the spending power of those who might consider Malta for their next holiday. The weak euro should make us more attractive to UK holidaymakers even if many other factors could influence their choice of holiday destinations.

Many economists argue that a game changer could be the quick end to the Ukraine war. But this is hardly likely. Another positive development might be the ECB acknowledging that there is an inflation problem that is much bigger than acknowledged and acting to scrap quantitative easing and begin raising interest rates sooner rather than later.

The economic climate in the eurozone has not been as riddled with uncertainty as it is at present. The effects of long COVID continue to worry both health and economic policymakers. The duration of the Ukraine war seems to be extending beyond any initial predictions. The continuous squabbles among EU member states on the best way to promote economic recovery encourage inertia. The risk of spiralling inflation leading to civil unrest presents formidable challenges to political and business leaders.

The weakening euro may help countries like Germany with an economy based on the export of goods. It may also benefit countries like Spain and Italy to attract more US tourists. But it may also present more formidable challenges to more open economies.