The consolation of the fall of the euro: more VAT when buying crude oil and competitive prices

The Russian decision to indefinitely cut off the gas supply to Europe through the Nord Stream 1 gas pipeline has set off all the alarms in the Old Continent, where recession is taken for granted in countries like Germany or Italy. That uncertainty has caused the euro to fall to a twenty-year low on Monday and even lose the exchange rate of 0.99 dollars. Since January, the European currency has plummeted about 15% in the context of a crisis that worsens as autumn approaches. The strength of a currency indicates confidence in an economy and also determines the purchasing power of its citizens: a weaker euro makes everything that Europe and Spain buy abroad more expensive, which is why they are said to import inflation. And this is especially so when the rise in the cost of living responds above all to the rise in raw materials in general and energy in particular, as well as food. The fact that the common currency’s collapse comes as inflation in the eurozone has hit its highest since its inception (reaching 9.1% in August) leaves little to no room for optimism. The only consolation that it can offer economies like Spain’s is the gain in competitiveness abroad, an effect that is tarnished by the fact that a significant part of our exports go to the euro zone (especially to France, Germany and Italy). Also, that the increase in the price of the products that we import in dollars, such as oil, allows the public coffers to enter more via taxes. The VAT levied on imports made it possible to collect 19,941 million euros net last year, according to the annual collection report of the Tax Agency (AEAT). It was 31.5% more than in 2020, the year in which the figures were distorted by the covid crisis and the almost total paralysis of the economy. Although, the bulk of this tax (for which 72,498 million euros were collected in total) came from internal operations, which contributed 52,557 million euros. With inflation shot up to 10.4% in August, according to the advance published by Statistics, VAT collection from these operations will also increase this year. In fact, tax revenues from January to July are already 14,016 million euros higher than those of the same period of the previous year. This cushion has allowed the Government of Pedro Sánchez to approve reductions such as the VAT on gas, which goes from 21 to 5%. Raymond Torres, director of the Funcas situation, emphasizes how a weak euro affects above all in terms of inflation, ” which is the main enemy we have because it erodes the purchasing power of households, consumption,” he tells this newspaper. Many raw materials are listed in dollars, such as oil and the main metals and minerals, or in other currencies linked to the greenback. A very complicated international context Indirectly, a weak currency affects the attitude of the European Central Bank, which, Despite not having the exchange rate among its objectives (but price stability), it does take this variable into account when acting and, in fact, adds pressure to raise official interest rates. The issuer tightens its monetary policy and with it the euro zone economy loses another of the pillars that was favoring expansion. At the domestic level, “this, in the end, ends up making mortgages more expensive and affects the demand for housing,” recalls Torres. From his point of view, the international context could not be more complicated. The latest report from the Bureau of Labor Statistics (BLS) revealed that between April and June, the US economy contracted for the second consecutive quarter, at an annual rate of 0.9%. This means that the country would have officially entered a technical recession. It is the same danger faced by Germany, due to its excessive dependence on Russian gas, and Italy, which is also fighting against its own internal ghosts. The transalpine country goes divided to the early elections on September 25, in which the far-right formation Fratelli d’Italia (Brothers of Italy), led by Giorgia Meloni, maintains a slight advantage in the polls over the Democratic Party (PD ) by Enrico Letta. A victory for the anti-European formation could complicate Rome’s access to the anti-fragmentation mechanism devised by the ECB and even to the funds of the Next Generation program, generating more uncertainty for the rest of the region. Savings, tourism and energy Within this uncertain context, the director of the Funcas situation points out several positive elements in the case of Spain: the ‘over-savings’ accumulated by households in the pandemic is being spent on tourism, on trips… which has repercussions of positively in our economy, highly dependent on these sectors. That effect could last until the fall. On the other hand, the behavior of exports of non-tourism goods and services shows much better results than the European average. In addition, within the recomposition of supply chains at a global level, Spain can benefit. And lastly, there is the diversification of our energy sources and the measures applied by the Government which, although insufficient, will in principle make it possible to avoid a total supply cut. “The perfect storm dominates, but within the shock, maybe we can make the blow less harsh for once,” says Raymond Torres.