What does the equal value of the euro and dollar mean for Aruba, Curacao and Sint Maarten? Opinion I Roland 0B van den Bergh
On Tuesday morning, July 12, the euro reached the same value as the US dollar. For a short time, the European single currency stood at exactly 1.0 dollar, and then rose again to $1,003. This means that the so-called parity level, at which the two coins are worth the same, has been reached. The last time the euro reached that level was at the end of 2002.
The focus on that one-to-one value of course means nothing in itself, that is purely symbolic. As if your car has reached 100,000 kilometers and is running around the clock: it’s just a number. Ultimately, it’s about the underlying flow, why those two coins are now worth the same and what the consequences are for the islands. Is that something we should be concerned about or not and is it good for the Caribbean islands?
Opinion I Roland 0B van den Bergh
The euro-dollar exchange rate has been erratic since the introduction of the euro.
When the dollar was introduced on January 1, 1999, the value of 1 euro was set at
1 .17 dollars. By October 2000, the value had fallen to its lowest point of $0.82 and in July 2008 the euro reached its all-time high of $1.60. The fluctuations were mainly the result of the monetary policy of the central banks.
The ECB in Europe, the FED in the United States and the economic outlook in Europe versus the United States. In addition, the dollar is the currency in which most goods and services are calculated
For example, think of the world prices of oil, gas, coffee and grain that are quoted in dollars and not in euros, Yuans or Rubles. It is therefore also the world number one reserve currency (also called anchor currency). If you own dollars, you run no dollar exchange rate risk and you can easily pay with it anywhere in the world. This is less the case for the euro.
The fall in the value of the euro – in short – is attributed to:
- the higher interest rate of the FED compared to the ECB: 1 .75% vs. 0.0%;
- the threat of gas shortages and the sharp rise in energy costs in Europe. The US, on the other hand, is a net energy exporter;
- the threat of a coming economic recession in Europe partly as a result of the war in the Ukraine. The economic outlook for the US is more favourable.
In addition, there is a lot of speculation about the exchange rate of the euro.
Sentiments among speculators and investors are currently negative towards the euro.
The majority expect the euro to fall further to possibly $0.95.
The Netherlands Antillean guilder (ANG) has been pegged to the US dollar since 1971 at a fixed rate of one dollar is 1.79 ANG. This means that our guilder and also the Aruban Florin show exactly the same exchange rate fluctuations against the euro as the US dollar.
For Curaqao, a lower euro exchange rate means that our holiday to Europe will be cheaper. Since 1 January, the Antillean guilder has increased in value by 12% against the euro. The strong dollar has also made destinations in Latin America cheaper for us islanders.
Goods and services from those countries have therefore become cheaper in principle. The point is, however, that the seller in, for example, the Netherlands or Colombia can decide to increase his margin and thus the price slightly and the trader in Curacao can decide not to pass on the price advantage to the consumer and to put it in his own pocket.
The fact that you do not immediately see that your new European car has become 12% cheaper may be due to the fact that the dealer bought the car more expensive, at an even higher price at the time. Furthermore, a European car can contain parts that must be paid for in dollars. Inflation, now 8.6 percent in Europe, also contributes to the fact that prices of European products in supermarkets have not become cheaper.
The latter argument does not hold up for many products and services because inflation in Europe is mainly the result of price increases for energy and transport. Many goods in Europe still have the same price as a year ago.
A smart consumer can realize the exchange rate advantage by ordering directly online from European web shops.
Curacao has become more expensive for the export of goods and services to nondollar countries. The island is becoming more expensive for European and Latino tourists. Curacao is highly dependent, for more than half, on Dutch tourists. The question is whether a more expensive stay on the island deters Dutch and other European tourists.
Perhaps that is not so bad because in practice there is a lot of family and friends traffic between the Netherlands and the Caribbean islands; many Dutch people have a second home on Curacao or Bonaire and therefore continue to come.
The trend in tourism is towards more authentic and exclusivity, which makes it less price sensitive. On top of that, COVID has led to fewer holidays and more savings for many Dutch people.
The lower euro could lead to a reduction in the demand for second homes on Curacao and Bonaire because this market is strongly dominated by Dutch buyers. Many apartment projects are under construction and new ones are in the pipeline. The outlook for this market has become more uncertain.
Negative trends are declining consumer confidence in Europe, the increased cost of a second home as a result of the higher dollar and increased construction costs, as well as more expensive airline tickets.
On the positive side, this is due to high inflation and lower investment results in Europe, which means that middle and higher income classes see a second home on a Caribbean island as a good investment alternative.
The low euro exchange rate leaves most consumers and businesses in Aruba and Sint Maarten largely untouched because these islands are highly dollarized and most goods and tourists come from North America.
Based on economic indicators from the past, such as domestic product, employment, unemployment, balance of payments, price level, government debt, tourism, the eurodollar exchange rate appears to have had a limited influence. This is partly because the euro-dollar exchange rate has been (too) low or (too) high for a period of several years. Whether and for how long the euro exchange rate will remain low is speculation. History shows that price developments in the medium term are unpredictable.
The Dutch government has a windfall in this, though? The loans granted to the Dutch Caribbean islands were given as an ANG loan, with the Netherlands running the currency risk. That is now favorable for the Netherlands. Repaying the loans now will quickly yield 10-20% extra euros in the Netherlands. The question is, of course, whether Curacao, Aruba and Sint Maarten are willing and able to repay. And by the way, if we have to pay off, we are one, two or more years further.
In summary, for the time being, as a Dutch-Caribbean island resident, you don’t have to worry too much about the low euro exchange rate.
Categories: St Maarten Currency Money