Wednesday, November 17, 2010
[IWS] BLS: THE IMPACT OF THE EUROPEAN DEBT CRISIS ON U.S. IMPORT PRICES [16 November 2010]
IWS Documented News Service
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
Focus on Prices and Spending | Import and Export Prices | Volume 1, Number 11
Third Quarter 2010
Current Price Topics: The Impact of the European Debt Crisis on U.S. Import Prices [16 November 2010]
The fallout from the recent European debt crisis leads to questions about its impact on exchange rates and the U.S. economy. On November 5, 2009, the newly elected Greek administration announced that Greece’s budget deficit would be more than double what was expected. This much larger budget estimate raised fears of Greek sovereign debt insolvency and sparked the beginning of the European debt crisis. The ensuing downgrades of Greece’s debt and similar doubts regarding Spain and Portugal’s solvency, which appeared during the first half of 2010, also contributed to the 18-percent decline in the value of the euro versus the U.S. dollar from November 2009 to June 2010. An interesting question is, did this drop in the value of the euro have any impact on import prices to the United States from the European Union (EU)?
Historically, the movement of the euro against the U.S. dollar appears to affect the price of imported goods from the EU. The locality of origin (LOO) price index of imports from the EU published by the Bureau of Labor Statistics provides some evidence on the impact of exchange rate changes. The euro was first introduced as an electronic currency in 1999 and remained relatively flat from that point until 2002. In 2002, banknotes and coinage were introduced and the euro began to appreciate in relation to the U.S. dollar. In response, import prices from Europe also increased. Conversely, subsequent dips in the euro’s value tended to pull the import price index down.
From the onset of the European debt crisis that began with the Greek debt announcement in November 2009 to June 2010 when the value of the euro bottomed out versus the U.S. dollar, the euro depreciated 18-percent. However, chart 1 shows that import prices from the EU actually continued to rise slowly as the crisis began. There was a notable flattening between February and May 2010, and the index turned slightly downward in June 2010.
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