European policymakers and large exporters are increasingly uneasy about the euro’s rise — particularly against the U.S. dollar. But this concern is misplaced. Like arguments for tariffs, it mistakes accounting effects for economic damage. A stronger euro does not weaken Europe; it strengthens it.
The euro is strengthening even as the European Central Bank (ECB) has lowered interest rates by 200 b.p. already. This is framed as a “dilemma” — as though the currency’s appreciation demands correction. So far this year, the euro has risen 14% against the U.S. dollar, reaching its highest level in nearly four years. And yet, it remains roughly where it stood at the time of its introduction, and has traded strongly many times in the past 25 years.
Still, Financial Times quotes ECB Vice President Luis de Guindos warning that a level above $1.20 would be “much more problematic.” If U.S. interest rates remain significantly higher than those in the eurozone, why is the euro gaining ground at all, puzzling central bankers and analysts alike?
The recent appreciation of the euro against the U.S. dollar is less a story of euro strength than a reflection of dollar weakness. Despite the ECB’s recent rate cuts and ample eurozone liquidity, the euro has risen sharply against the dollar — and modestly against the Japanese yen — but not uniformly across currencies. Against the British pound, for example, the euro’s value has remained broadly stable, with little change over one or even three years.
The dollar, by contrast, has shown clear signs of slippage: over the past year, it has lost more than 10% of its value against sterling and nearly 7% against the yen. Against the euro, the decline has been sharper — 14% — though not unprecedented. Meanwhile, euro–pound fluctuations remain well within historical norms.
These moves point not to a surge in global demand for euros, but rather to a broader repositioning away from the dollar. The reasons are easy to trace: shifting expectations around U.S. interest rates, fiscal risks, rising trade tensions, and portfolio rebalancing. The euro’s rise is largely the dollar’s retreat.
ECB officials have warned that a stronger euro could “complicate export performance,” and large European firms have echoed this concern. They tend to reduce growth to a mechanical output of the GDP formula: exports minus imports equals net growth. In this framework, anything that dampens exports — such as a stronger currency — is treated as a drag on the economy, while imports are viewed almost as a liability.
This logic is flawed. It confuses GDP arithmetic with real economic value. A nation does not grow richer by exporting more simply for the sake of exporting — especially if that comes at the cost of reducing domestic purchasing power. Weakening the euro may make exports look more competitive, but it simultaneously erodes the value of incomes, savings, and imports for all euro users.
Indeed, this trade-off is often ignored in corporate commentary. As reported by Financial Times, SAP estimates that every $0.01 increase in the euro-dollar exchange rate shaves €30 million off its annual revenue. Heineken claims a similar appreciation could cost €180 million in adjusted profit. Schneider Electric foresees up to €1.25 billion in revenue losses. HelloFresh warned that a move from $1.04 to $1.14 could cut its operating profit by €28 million.
But these warnings are rooted in reporting conventions, not necessarily real losses. Exchange rate fluctuations only affect headline profit figures when foreign revenues are translated back into euros. The actual profit in the local currency — dollars, pesos, yen — remains unchanged. Unless firms face a structural mismatch between costs and revenues across currencies, the real economic impact is limited.
For example, if SAP earns $1 million in the U.S., the only thing that changes under a stronger euro is how that profit is reported in Europe. At EUR/USD = 1.00, it books €1 million. At 1.10, it reports €909,090 — a 9% drop on paper. But U.S. costs, denominated in dollars, also fall in euro terms. Only when a company earns revenue in foreign currency but pays most of its costs in euros — and does not hedge — does a stronger euro genuinely compress margins.
On the other hand, a rising euro increases the purchasing power of everyone who uses it, reducing import costs and easing inflationary pressure. Whether buying domestic or foreign goods, eurozone households and firms can afford more.
This logic applies to businesses as well. Many of the same companies warning of revenue losses rely on imported raw materials, components, and energy — often priced in dollars. A stronger euro reduces these input costs, cushioning margins and supporting profitability. The actual effect depends heavily on sector structure.
Of course, not all sectors are affected equally by a stronger euro — but that is precisely the point. The impact depends on the cost structure. For manufacturing and industrial firms, material inputs often make up 50 to 70 percent of total costs, with labour accounting for just 10 to 25 percent. In these cases, a stronger euro is typically a net benefit, especially when key components or raw materials are imported.
In the consumer goods and food sectors, such as Heineken or Nestlé, material costs typically account for 30 to 60 percent of expenses, with labour making up another 20 to 30 percent. Here, too, a stronger euro is often a net positive — lowering the price of imported inputs like grain, packaging, and energy.
Technology and software firms present a different profile: labour costs dominate, often comprising 50 to 80 percent of expenditures, while material costs are minimal. If their revenues are dollar-denominated and unhedged, a stronger euro may compress margins. Still, this is not a reason to manage the euro — it is a reflection of cost structure and hedging policy.
The case is clearest in the energy and commodities sectors, where inputs — fuel, metals, transport — are overwhelmingly priced in dollars. For these firms, a stronger euro unambiguously reduces costs. The idea that a single exchange rate should be “managed” to please all sectors equally is misguided. Central banks should not manipulate currency levels just to protect firms with mismatched cost structures.
Consumers, too, benefit from a stronger euro. It allows households to access both domestic and foreign goods at lower relative prices. It is the most effective — and least distortionary — way to strengthen real incomes. Unlike perpetual inflation, which erodes savings and undermines planning.
We have seen this playbook before. During the last decade, sluggish growth was often blamed on external competitiveness rather than internal structural weakness — and central banks responded with ever more aggressive monetary interventions. The result was not a productivity revival, but distorted asset markets, moral hazard, and the inflation surge we are still recovering from.
Europe does not need a weaker currency. It needs a stronger understanding of what sound money actually means — and the courage to resist short-term fixes that create long-term distortions.
Written by Leonardas Marcinkevicius
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