A Cheaper Europe for U.S. Tourists
By Beth Carney
Irish hotel owner Michael Rosney considers himself broadly pan-European, but one result of last week's referendums rejecting the European Union constitution has him cheering. The fall of the euro could turn into a boon for his business. "Thanks be to God," says Rosney, whose 32-room Killeen House Hotel outside Killarney draws more than 80% of its guests from the U.S. Since a few weeks ago, when the euro started to slide, inquiries and bookings have risen, says Rosney. "I'm delighted."
The euro, which has been drifting lower since mid-March, dropped sharply in the wake of the populist uprisings in France and the Netherlands. The 12-nation currency is trading at around $1.23, a 10% drop against the dollar this year.
That comes as welcome news to Americans planning a jaunt across the Atlantic and to the Europeans hoping to profit from the suddenly stronger greenback, even if some would like to see an even bigger currency move.
"Relative to December, it's a pretty significant fall," says Julia Cardis, travel industry analyst for Mintel International Group in Chicago. She believes that the shift's biggest effect is on tourists' thinking:: "Travelers will feel more confident spending."
In truth, travel to Europe has been growing over the past two years despite the weak dollar. Most analysts say the euro's slide isn't big enough to draw hordes of new visitors abroad. The exchange rate is now about the same as it was last year at this time, and still below the one-to-one ratio that many Americans remember from three years ago -- and would like to see again.
"HOLDING OUR BREATH."
Moreover, timing limits the potential upside of the recent euro weakness for the European tourism industry. People taking long-haul journeys tend to plan their trips well in advance and will already have vacation plans for the summer, according to Cardis. In addition, analysts point out that by now, airlines have already sold most of their least expensive summer fares, so bargain-hunters would have a tough time finding cheap seats to the most popular destinations.
Still, the euro trend comes as reassurance to those in the European hospitality business, particularly in light of where it was headed last winter. Nora Brossard, a spokeswoman for the European Travel Commission, which represents the tourism boards of 33 countries, says she thinks there would be a "psychological breaking point" for tourists if the euro were to trade in the range of $1.40 to $1.50. Its December peak of $1.36 was uncomfortably close. "We were all holding our breath a bit," she says.
The main benefit of the recent drop in euro value will probably be a boost in the amount Americans spend, analysts says. Thanks to an improved domestic economy and pent-up demand for European travel, the American tourist is already making a big comeback abroad, following a two-year setback beginning in 2001, when outbound international visits declined.
In the first 10 months of 2004, 10.4 million U.S. citizens traveled to Europe, up 14% from the previous year, according to the U.S. Office of Travel & Tourism Industries. The weaker euro means the current crop of visitors will have more room in their budgets for extras.
"What it's likely to do is get somebody to go to a better-caliber restaurant or do a bit more shopping than planned," says Henry Harteveldt, vice-president for travel research at Forrester Research in San Francisco.
John Paolo, owner of Leonardo Leather Works, a Florence (Italy) store that relies on tourists for much of its business, agrees that any strengthening of the dollar can lead to more sales. For that reason, he'd love to see the euro fall to parity with the buck again.
Whether the euro will drop further, however, or even stay at its current level remains a big question. The euro's reaction to the EU referendums has caught many currency strategists by surprise, since polls had accurately predicted the outcome of those votes.
While the dollar has been strengthening for several months, the euro has been falling against various currencies, for reasons besides turmoil over Continental unity, including increased uncertainty about the European economy and a general loss of trading momentum, says Trevor Dinmore, currency strategist at Deutsche Bank in London.
Dinmore expects the euro to bottom out at around $1.20. Further into the future, however, he thinks the dollar remains vulnerable because of the continuing U.S. trade deficit. "Our view is that, in the bigger picture, variables still point to dollar weakness over the long run," he says.
In the meantime, European tourism operators still face a challenge in promoting the Continent as an affordable destination, says Rachel Tym, European affairs manager for the European Tour Operators Assn., which represents international tour operators, hotels, and attractions.
"Once you have a reputation as being an expensive destination, it is very difficult to shrug off, because people come, and then go back and tell their friends, 'Oh, it was so expensive,'" says Tym. Visitors in early summer won't be complaining quite so much. In fact, they may be smiling.
Carney is a BusinessWeek Online correspondent based in London