A Weak Euro Is Not Europe’s Main Advantage, Mr. Trump

(Bloomberg Opinion) -- The other day, U.S. President Donald Trump retweeted my column about overtourism in Europe. I’d simply accept the extraordinary publicity of the presidential retweet, if he hadn’t claimed in his tweet that an undervalued euro is the reason Europe faces an excess of tourists. That, in my view, is largely inaccurate; a weak euro really isn’t the story behind Europe’s tourist boom. Nor does it give Europe the trade advantage Trump seems to be implying.

In theory, tourists are attracted to destinations where their money goes further than at home. In the 2018 EU Tourism Trend Report, produced by the United Nations’ World Tourism Organization, exchange rates are mentioned as a factor that can affect the direction of tourist flows, and a certain relationship exists between the euro’s relative weakness and foreign tourism.

But, according to the UNWTO report, the impact of exchange rates is “rather contained in comparison to the effects of factors such as the cost of living at the destination, the cost of transport or safety.” 

If the euro’s undervaluation in relation to the dollar were a major factor, tourist arrivals in the European Union (most, but not all of which uses the euro) would have grown faster in the last decade than in the U.S. In fact, the opposite is true: EU arrivals increased by an average of 3.2% a year between 2005 and 2017, while North American arrivals grew at the rate of 3.6%. 

One couldn’t tell from the number of loud conversations in American English, but it’s not primarily Americans who clog up the Louvre and the Vatican. In 2016, the latest year for which such data are available from the EU, of the 521 million of tourist arrivals at EU destinations, 361  million were from other EU countries. And it’s not Americans who have accounted for most of the recent growth in non-EU arrivals, either. Between 2012 and 2016, the number of nights spent at EU hotels by tourists from Asia increased by 82% to 138 million. Americans spent 120 million nights, 40% more than in 2012.

Even if all Americans stopped coming to Europe, some of its most popular locations would still be flooded with visitors – simply because Europe is so rich in well-publicized historic landmarks and art treasures. 

The question to ask, though, is whether Trump has a broader point – that the euro is undervalued and Europe is reaping unfair trade benefits from it.

On the surface, it might appear so: According to the Organization for Economic Cooperation and Development, the common currency is indeed undervalued by more than 22% against the dollar. The International Monetary Fund, for its part, sees the euro as slightly undervalued.

The euro, however, is a one-size-fits-all currency for 19 very different economies (plus Montenegro and Kosovo, which use it despite not being EU or euro area members). It may be undervalued for Germany, but it isn’t for other countries, such as Italy and Spain. Though German exporters benefit from the exchange rate, Italian ones are adversely affected by it.

As a result of this, there is only a weak correlation between the U.S. trade deficit with the European Union and the exchange rate. 

Even Germany, which, by all measures, uses an undervalued currency, isn’t a clear-cut case of an unfair trade advantage. Though some recent studies have shown its bumper trade surplus is, for a significant part, explained by the euro undervaluation, economists at the European Commission’s Joint Research Center argue that a stronger real exchange rate of the euro would only have resulted in a very slight decrease in the German trade surplus, which is, over the long-term, driven by growth in savings and foreign demand. 

As with tourism, European trade advantage isn’t entirely price-driven. German, French and Italian goods often aren’t so cheap as to be competitive with those coming, for example, from Asia, but they’re of higher quality – and it’s been shown that rich countries tend to import more from countries that produce higher-quality goods. 

Trump is, of course, a big-picture leader going for big-picture wins. But when it comes to the euro’s relative undervaluation, the details are important. The currency rate affects trade (and tourism as part of it), but it’s not the defining factor – and certainly not Europe’s core competitive advantage.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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