Issue link: https://maltatoday.uberflip.com/i/1473504
3 maltatoday | SUNDAY • 17 JULY 2022 DAVID CASA DONE #WorkLifeBalance MORE RIGHTS FOR MUMS Energy prices A weak euro is no tonic for the state of energy and fuel prices. Payments for natural gas and oil tend to be in US dollars, with eurozone countries now forced to pay more euro to purchase fuel at previous prices. "Indeed a weak euro will ex- asperate inflationary pressures, making any dollar-denominated products like fuel more expen- sive," Portelli said. Meilak pointed out that the EU is trying to sway away from Russian imports, making US imports more costly for major energy importers. "One could see higher energy prices in the EU as a result of both the direct increase in en- ergy prices and the price of the dollar with respect to the euro." The biggest loser in this is the government. "A weaker euro would mean government hav- ing to pay more to keep fuel prices at pre-crisis levels," von Brockdorff said. Scicluna shared this sentiment. "The euro depreciation will im- ply further costs to the govern- ment, with obvious implications for public finances, unless the public entities have entered into hedging agreements either for exchange rate changes, or US dollar price changes, or both." Hedging agreements take many shapes, but in all formats their aim is to protect investors from adverse fluctuations in the market. Tourism and airlines Competitive prices will be a good sign for Malta's tourism industry, the country's big- gest export. Scicluna said that a weak euro will make going abroad more expensive for the Maltese, but tourists coming to Malta from outside the euro- zone will find local prices more palatable. However, Meilak pointed out that this positive effect could be counterbalanced by the rising EU commodity prices resulting from the war in Ukraine. Another negative effect on tourism could come from the European-based aviation in- dustry. Von Brockdorff pointed out that aviation fuel is gener- ally procured in US dollars. "A weaker euro would result in higher costs for the industry, possibly increasing ticket pric- es." But there's a mitigating factor to this, according to von Brock- dorff. Airlines commonly hedge against fuel, a strategy that al- lows companies like Ryanair and Lufthansa to save millions of euro, "albeit for a defined pe- riod of time", Brockdorff said. "Higher ticket prices, howev- er, would obviously make air travel more expensive. When combined with the higher pric- es Europeans are paying at the moment and for the foreseea- ble future, this raises concerns about the future of the airline industry following the rebound which has seen airlines, includ- ing Air Malta, reaching capacity levels of above 90%. How did it come to this? Portelli pointed to three rea- sons as to why the US dollar has been rallying against most ma- jor currencies. "The Federal Reserve has been considerably more aggressive in raising interest rates to combat inflation than the ECB has," he pointed out, adding that Amer- ican fixed-income products will appear more attractive than Eu- ropean ones. "Secondly, there's a feeling that the EU economy is weaker than the US, thus the ECB may be less aggressive raising rates." His third point was that, between the uncertainty in Ukraine and a global economy facing stagflation, there is an element of 'flight to quality' to the US dollar – a phenomenon in financial markets which sees investors shifting en masse out of high-risk investments. Von Brockdorff similarly said that euro-dollar parity is down to the late response on the ECB's part to react to the euro inflation rate. But he also adds four other factors that resulted in the euro slide. Supply problems are lim- iting the euro area's potential output, while fears of high en- ergy and commodity prices are beginning to impact consump- tion. On top of this, businesses are postponing investment due to the prospects of an economic slowdown, while Germany – the euro area's largest economy – registered a trade deficit for the first time in years. Alternatively, Stephanie Fabri pointed out that this event is not representative of the euro's value relative to the dollar. "The US and euro-area mone- tary policy cycles are currently not synchronised, with US rates rising much faster than in the euro area, thus boosting the val- ue of the dollar." She argues that this situation has been driven primarily by the dollar rising in value, rather than the euro falling. "The level of competitiveness in the euro area has not reduced in ways that indicate a structural loss of competitiveness." However, when looking to- wards the long-term Portelli notes that currencies rarely stay at an extreme point for too long. "I'm sure the euro will stabilize and rally again towards $1.20 in the coming years." Fabri is more cautious, saying that the EU needs to identify ways of exerting influence in an era of increasing geopolitical significance. "If a strong curren- cy is one way of doing that, the EU must necessarily find ways of increasing the euro's attrac- tiveness abroad." "To do that it needs to in- crease the attractiveness of its economy. And given the cur- rent global situation, this is one of Europe's biggest challenges." Euro-dollar parity spells troubling times for Maltese importers