The American who came to visit unexpectedly last weekend still had some money left. He had a detour made to visit Amsterdam again and Hello to say. And it could be removed, because Europe, he said, is dead cheap.
He is certainly not alone. American media expect a continuation of the tourist wave to Europe next summer that has been taking place since the dark days of Covid (2020 and 2021). 2022 was already a great year. How does that continue? Strangely enough, there are hardly any Europe-wide figures for 2023 – they will only be available in the late summer. But the Central Bureau of Statistics is fast. In 2023, 1.5 million Americans came to the Netherlands, of which 1 million to Amsterdam. Another significant increase, after 2022.
Strikingly, the number of visiting American guests has been increasing for years, in line with the rest of the foreign vacationers – together they are part of the same tourist explosion of the past decade or more. But the number of American overnight stays is increasing faster than that of other tourists. So they stay longer, and there is apparently more money to spend per tourist. And there is a reason for that: as was already said at the kitchen table, Europe is cheap.
In 2008, when the exchange rate of the US dollar was very weak, the relative price level in the Netherlands was a quarter higher than in the US. It was the time when people bought a new laptop in New York and paid for their plane ticket with the price difference compared to home.
In recent years, this has been the other way around: living expenses in the Netherlands are now 15 percent cheaper than those in the US. The dollar exchange rate plays an important role in this, as do inflation differences between the Netherlands and the US – if these have not already filtered through to the exchange rate.
Planners, and certainly not only in the tourism sector, will wonder what the dollar exchange rate will do in the future. And that is an almost impossible question. So many factors influence the exchange rate between the euro and the dollar that it is actually completely unpredictable in the short term.
The dollar can certainly become stronger. The current rate of 1.07 dollars per euro is no exception. It can be much, much more extreme. Just take a look.
What is particularly striking is the first half of the eighties. Interest rates in the United States were relatively high to stem high inflation, while at the same time the economy was strongly stimulated under Republican President Reagan with tax cuts, among other things. The top income tax rate went from 70 percent to ultimately 28 percent. Under Reagan, the budget deficit rose sharply, to a then post-war record of 5.9 percent.
The combination of strong economic growth, large deficits that had to be financed and high interest rates resulted in a huge inflow of foreign money, which first had to be converted into dollars. And all that gave the exchange rate a significant boost. In 1985, the dollar, converted back to the euro, which did not yet exist, was more than 50 percent stronger than it is today.
That was too much. That year, a special agreement was reached at the New York Plaza hotel between the major industrialized countries, including the US, Germany and Japan, to force the US currency down. Fun fact: that Plaza hotel would be bought three years later from a local real estate boy: Donald Trump, who sold it again in 1994 to finance a divorce.
There are economists who see an analogy between the Reagan era and now. The Biden administration (and Trump before that with tax cuts) is busy stimulating the economy, resulting in huge budget deficits of up to 7 percent – which the International Monetary Fund warned about last week. US inflation has not yet fallen nearly enough, and in recent days more and more analysts are wondering whether there will be a US interest rate cut this year. Or that an interest rate increase will even be implemented – which was completely unthinkable a month ago.
Now history never literally repeats itself, but the similarity between now and then is indeed striking. There is a chance that the US will keep interest rates higher than expected because the economy is running so fast. In the meantime, the eurozone is preparing for the first interest rate cut, and the economy is struggling along.
Interest rate policies on both sides of the Atlantic may therefore diverge further. And interest rate differences, adjusted for inflation, play a significant role in the mutual exchange rate between the dollar and the euro in the medium term. You can see that clearly here:
That could still be exciting. Is the rest of the world losing confidence in the dollar as US debt becomes dangerously high? Or is the Reagan effect taking place, with large inflows to the US because there is still no real alternative to the American world currency? The number of Americans in the Amsterdam street scene could well become a good indicator.
