Academic and industry researchers have over the years found that fluctuations in exchange rates affect international tourist flows. WIth roughly 23 million North Americans visiting Europe each year, changes in exchange rates can help boost or depress national economies, especially in countries that depend on tourism for much of their economic activity.
Within the euro zone, Spain and Greece both rely heavily on tourism, and France, Spain, Italy and Germany all ranked among the 10 most visited countries in each of the last two years. With job growth anemic still throughout Europe -- even more so than in the US -- a boost in tourism could provide a shot in the arm for a number of economically struggling countries, including Greece and Spain.
The logic behind this linkage is simple: When one currency becomes cheaper relative to another, it becomes easier for those earning the stronger currency to afford goods and services priced in the cheaper one. A €500 vacation package that costs $625 when the euro trades at $1.25 drops $200 in price when the euro falls to $0.85 in value.
While the euro hasn't fallen that far yet, it has fallen significantly in recent months, hitting 14-month lows as of close of trading yesterday. That should appeal to the wanderlust of cautiously optimistic Americans who increasingly feel free to spend money on nonessential items once again.
Written by Sandy Smith