THE EXCHANGE RATES OF THE EURO VS OTHER … exchange rates of the euro vs other main currencies and...

NOTE

Policy DepartmentStructural and Cohesion Policies

THE EXCHANGE RATES OF THE EURO VS OTHER MAIN CURRENCIES

AND THEIR IMPACT ON EU TOURISM

TRANSPORT AND TOURISM

ENJune 2007

Directorate General Internal Policies of the Union

Policy Department Structural and Cohesion Policies

TRANSPORT AND TOURISM

THE EXCHANGE RATES OF THE EURO VS OTHER MAIN CURRENCIES

AND THEIR IMPACT ON EU TOURISM

NOTE

Content:

This note examines exchange rate changes between the Euro and five other key currencies: the US dollar, Japanese yen, Chinese yuan, Russian rouble, and British pound. It is analysed if exchange rates have had a measurable impact on the flow of tourists from each of the five key currency counties to Europe (in particular the Euro area).

IP/B/TRAN/IC/2007-007 18/06/2007 PE 379.231 EN

This note was requested by the European Parliament's Committee on Transport and Tourism. This paper is published in the following language: - Original: EN. Author: Kevin MILLINGTON Acorn Consulting Partnership Ltd Responsible Official: Nils DANKLEFSEN Policy Department Structural and Cohesion Policies European Parliament B-1047 Brussels E-mail: [email protected] Manuscript completed in June, 2007. This note is available on the Internet at: http://www.europarl.europa.eu/activities/expert/eStudies.do?language=EN Brussels, European Parliament, 2007. The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy.

http://www.europarl.europa.eu/activities/expert/eStudies.do?language=EN

The exchange rates of the euro vs. other main currencies and their impact on EU tourism

Executive Summary 1. For the purposes of this briefing paper, the exchange rates of the following five currencies have

been chosen for analysis against the euro: the US dollar, Japanese yen, Chinese yuan, Russian rouble, and British pound.

2. Although there have been fluctuations in the exchange rate between the euro and the five

currencies identified for analysis, generally speaking the euro has strengthened against all five over the period 2001-2005. This means that residents of the United States, Japan, China, Russia and the United Kingdom need to spend more of their own currency to buy one euro.

3. With the exception of the British pound, the strengthening of the euro against the other four

currencies was similar – that is between 23% and 28% when comparing the exchange rate in January 2001 and December 2005. By comparison the euro only strengthened by around 8% against the pound.

4. Tourist arrivals in the euro area from the United States and Japan declined over the period 2001-

2005, whilst arrivals from China, Russia and the UK increased. Growth in the China market was substantial, largely due to a considerable number of European destinations acquiring an Approved Destination Status (ADS) from the Chinese government over the period, thus opening up their countries to Chinese travellers.

5. Analysis of the exchange rates between the euro and the five currencies, and the corresponding

tourist flows between the source destinations and Europe (but particularly the euro area), indicates that there is no conclusive evidence that the increasing strength of the euro over the period 2001-2005 has had a negative impact on inbound tourism.

6. A large number of studies undertaken over the last 30 years indicate that exchange rates do affect

the flows of tourists between countries, however their influence is usually smaller than other factors such as the cost of living at the destination, the cost of transport to the destination, and non-monetary factors such as safety. Also, the volume of trips is not always affected by exchange rates, but instead the behaviour of tourists at their destination – most commonly displayed by a shorter length of stay and/or lower average daily expenditure.

7. As a consequence of the relatively minor influence of exchange rates, it is likely that only in

situations where all other factors that affect tourist flows remain equal, would exchange rates have a measurable impact on the destination choice of tourists.

8. There do not appear to be any examples of national or regional tourism administrations

developing or implementing policies or action plans to respond to adverse or positive changes to exchange rates. However, it is common for the tourism trade (such as tour operators) to establish their contracts (for example with hotels) with fixed exchange rates.

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9. National and regional tourism administrations can benefit from fluctuating exchange rates, in particular minimise the effects of a strong euro, by targeting those markets that are less sensitive to exchange rates (such as business travellers and higher spending tourists), increasing marketing activities in destinations whilst exchange rates are favourable (and therefore less expensive), by ensuring they do not rely too heavily on one market, and developing a unique product that ensures tourists do not have a viable alternative. Alternatively, a weak euro could offer the opportunity for destinations to attract border crossers and day-trippers, as these are known to be most likely to respond to currency fluctuations.

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List of figures Figure 1. Exchange Rates 2001-2005: Euro vs US Dollar ...............................................................3

Figure 2. Exchange Rates 2001-2005: Euro vs Japanese Yen..........................................................4

Figure 3. Exchange Rates 2001-2005: Euro vs Chinese Yuan.........................................................6

Figure 4. Exchange Rates 2001-2005: Euro vs Russian Rouble ......................................................7

Figure 5. Exchange Rates 2001-2005: Euro vs British Pound .........................................................9

Figure 6. US: Percentage Change in Exchange Rate and Arrivals.................................................12

Figure 7. Japan: Percentage Change in Exchange Rate and Arrivals.............................................14

Figure 8. China: Percentage Change in Exchange Rate and Arrivals ............................................15

Figure 9. Russia: Percentage Change in Exchange Rate and Arrivals ...........................................17

Figure 10. UK: Percentage Change in Exchange Rate and Arrivals ................................................18


List of tables Table 1. US Tourist Arrivals in All Types of Accommodation ......................................................11

Table 2. Japanese Tourist Arrivals in All Types of Accommodation .............................................13

Table 3. Chinese Tourist Arrivals in All Types of Accommodation...............................................15

Table 4. Russian Tourist Arrivals in All Types of Accommodation...............................................16

Table 5. UK Tourist Arrivals at International Borders....................................................................18

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TABLE OF CONTENTS

Page Executive Summary ......................................................................................................................... iii

List of figures ......................................................................................................................................v

List of tables...................................................................................................................................... vi

1. Introduction ................................................................................................................................1

2. Exchange Rate Fluctuations: 2001-2005 ..................................................................................2 2.1. Overview..............................................................................................................................2 2.2. The US Dollar ......................................................................................................................2 2.3. The Japanese Yen.................................................................................................................2 2.4. The Chinese Yuan ................................................................................................................2 2.5. The Russian Rouble .............................................................................................................2 2.6. The British Pound ..............................................................................................................10

3. Tourist Flows to Europe ..........................................................................................................10 3.1. Introduction ........................................................................................................................10 3.2. Arrivals from the United States..........................................................................................11 3.3. Arrivals from Japan............................................................................................................12 3.4. Arrivals from China ...........................................................................................................14 3.5. Arrivals from Russia ..........................................................................................................16 3.6. Arrivals from the UK .........................................................................................................17

4. Effects of Currency Changes on Travel Patterns..................................................................19 4.1. Introduction ........................................................................................................................19 4.2. Key Determinants of Tourist Flows...................................................................................20 4.3. Key Exchange Rate Impacts ..............................................................................................20 4.4. Impacts of Currency Changes in Europe ...........................................................................21 4.5. Policies and Actions to Respond to Exchange Rate Fluctuations......................................21

5. Recommendations ....................................................................................................................22

Bibliography .....................................................................................................................................23


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1. Introduction There have been numerous studies undertaken over the years regarding the impact of exchange rates on tourism flows between countries. These studies all have very different outcomes, and there do not appear to be any common conclusions. However, in general it is widely accepted that changes in exchange rates do have an impact on visitor flows to various extents. The value of one currency against another is known as the exchange rate, and discussions about exchange rate movements can involve a number of different terms that in fact refer to the same thing. For example, the statements “the dollar is depreciating against the euro” and “the euro is strengthening against the dollar” mean the same thing, but have opposite implications for Americans and those Europeans living in the euro area. An exchange rate quotation is given by stating the number of units of a price currency can be bought in terms of a unit currency. For example, in a quotation that says the Euro-US Dollar exchange rate is 1.2 dollars per euro, the price currency is the dollar and the unit currency is the euro. The usual unit currency varies by geographic location. For example, British newspapers quote exchange rates with British pounds as the unit currency. For the tourist, if their currency is strengthening against another currency, it enables them more to buy more of that currency with one unit of their own currency. Therefore, if a unit currency is strengthening (or appreciating) - i.e. if the currency is becoming more valuable - then the exchange rate number increases. Conversely if the price currency is strengthening, the exchange rate number decreases and the unit currency is depreciating. This study examines exchange rate changes between the euro and five other key currencies: the US dollar, Japanese yen, Chinese yuan, Russian rouble, and British pound, over the five year period 2001-2005. The British pound was chosen in addition to the four currencies identified in the brief due to the importance of the outbound market from the UK. The period 2001-2005 has been selected due to statistics related to tourism flows only being currently available up to the end of 2005. The 12 countries that have been within the euro area during the period 2001-2005 have been selected for specific analysis within this Briefing Paper, these are: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Only Denmark, Sweden and the UK have been included as those countries outside the euro area, as they have been members of the European Union since 2001. During the period of analysis covered by this Briefing Paper (2001-2005) there has been a considerable strengthening of the euro against all five of the currencies of the source markets selected for analysis, thereby, in theory, making euro area countries more expensive to visit for Americans, Japanese, Chinese, Russians and the British. If a strong euro does indeed discourage tourists visiting the euro area, then it is important to address this issue.

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2. Exchange Rate Fluctuations: 2001-2005 2.1. Overview Although there have been fluctuations over the period 2001-2005, generally speaking the Euro has strengthened against all five currencies being analysed (the US dollar, Japanese yen, Chinese yuan, Russian rouble and British pound). This means that for residents in these five countries, they will need to spend more of their own currency to buy a euro. This would appear to indicate, therefore, that travelling to any country in the euro area has become more expensive for these residents. This is usually, although not necessarily, true as will be discussed later. 2.2. The US Dollar The average exchange rate of the US dollar to the euro in January 2001 was 0.94 (that is, USD 0.94 bought EUR 1.00). By December 2005, the average exchange rate of the US dollar to the euro was 1.19 (that is, USD 1.19 bought EUR 1.00), a rise of 26.6%. During this period, the euro peaked in December 2004 when the exchange rate hit an average of USD 1.34 to EUR 1.00, a rise of 42.6%. The fluctuating exchange rates between the US dollar and the euro are shown in Figure 1. 2.3. The Japanese Yen There has been a steady strengthening of the euro against the yen over the period 2001-2005. In 2001, JPY 109.39 bought EUR 1.00, however by December 2005, the euro had strengthened considerably, with JPY 140.38 buying EUR 1.00 – an increase of 28.3%. The fluctuating exchange rates between the yen and the euro are shown in Figure 2. 2.4. The Chinese Yuan Until 21st July 2005, the Chinese Yuan was pegged to the US dollar. Since then, China has fixed its exchange rate based on a basket of currencies. However, this means that for the period 2001-2005, the exchange rate of the yuan and the euro largely reflects that between the US dollar and the euro, as can be seen in Figure 3. This means that there has been a gradual strengthening of the euro against the yuan, which peaked in December 2004. In January 2001, CNY 7.76 bought EUR 1.00, whilst by December 2005, CNY 9.58 bought EUR 1.00, an increase of 23.5%. This peaked in December 2004 when CNY 11.10 bought EUR 1.00, an increase of 46%. 2.5. The Russian Rouble Similar to the US dollar and Chinese yuan, the Russian rouble was at its weakest against the euro in December 2004. As with all the other currencies, there has been a general strengthening of the euro against the rouble over the period 2001-2005, starting out at RUB 26.65 for EUR 1.00 in January 2001 and reaching RUB 34.17 in December 2005, an increase of 28.2%. However in December 2004 it reached RUB 37.37, an all time high for the period, corresponding to an increase of 40.2% on the January 2001 exchange rate. The fluctuating exchange rates between the rouble and the euro are shown in Figure 4.

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Figure 1. Exchange Rates 2001-2005: Euro vs US Dollar

Average Rate: US Dollars to buy 1 Euro

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2001 2002 2003 2004 2005

Number of US Dollars required to buy 1 Euro

2001 2002 2003 2004 2005

Jan 0.94 0.88 1.06 1.26 1.31

Feb 0.92 0.87 1.08 1.26 1.30

Mar 0.91 0.88 1.08 1.23 1.32

Apr 0.89 0.89 1.09 1.20 1.29

May 0.88 0.92 1.16 1.20 1.27

Jun 0.85 0.96 1.17 1.21 1.22

Jul 0.86 0.99 1.14 1.23 1.20

Aug 0.90 0.98 1.12 1.22 1.23

Sep 0.91 0.98 1.13 1.22 1.22

Oct 0.90 0.98 1.17 1.25 1.20

Nov 0.89 1.00 1.17 1.30 1.18

Dec 0.89 1.02 1.23 1.34 1.19

Ave 0.89 0.95 1.13 1.24 1.24 Source: www.x-rates.com.

US Dollars to buy 1 Euro (2001)

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


0.75

0.80

0.85

0.90

0.95

1.00

1.05



0.95

1.00

1.05

1.10

1.15

1.20

1.25




1.10

1.15

1.20

1.25

1.30

1.35

1.40



1.10

1.15

1.20

1.25

1.30

1.35


Figure 2. Exchange Rates 2001-2005: Euro vs Japanese Yen

Average Rate: Japanese Yen to buy 1 Euro

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2001 2002 2003 2004 2005

Number of Japanese Yen required to buy 1 Euro 2001 2002 2003 2004 2005 Jan 109.39 117.15 126.20 134.30 135.61 Feb 106.99 116.36 128.70 134.87 136.56 Mar 110.33 114.89 128.13 133.06 138.76 Apr 110.47 115.92 130.23 129.05 138.70 May 106.60 115.86 135.62 134.62 135.34 Jun 104.37 117.85 138.14 132.92 132.18 Jul 107.25 117.12 134.90 134.29 134.74 Aug 109.37 116.38 132.39 134.39 136.00 Sep 108.24 118.73 129.30 134.58 136.14 Oct 109.85 121.57 128.21 136.03 138.09 Nov 108.66 121.72 127.70 136.13 139.61 Dec 113.70 124.23 132.48 139.17 140.38 Ave 108.77 118.16 131.05 134.43 136.85

Source: www.x-rates.com

Japanese Yen to buy 1 Euro (2001)

98.00100.00102.00104.00106.00108.00110.00112.00114.00116.00

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave

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110.00

112.00

114.00

116.00

118.00

120.00

122.00

124.00

126.00

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave


120.00122.00124.00126.00128.00130.00132.00134.00136.00138.00140.00



122.00124.00126.00128.00130.00132.00134.00136.00138.00140.00



128.00

130.00

132.00

134.00

136.00

138.00

140.00

142.00



Figure 3. Exchange Rates 2001-2005: Euro vs Chinese Yuan

Average Rate: Chinese Yuan to buy 1 Euro

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2001 2002 2003 2004 2005

Number of Chinese Yuan required to buy 1 Euro 2001 2002 2003 2004 2005 Jan 7.76 7.31 8.80 10.46 10.86 Feb 7.62 7.21 8.93 10.46 10.77 Mar 7.52 7.26 8.99 10.15 10.91 Apr 7.39 7.34 8.99 9.92 10.71 May 7.24 7.59 9.56 9.93 10.50 Jun 7.06 7.91 9.66 10.05 10.06 Jul 7.13 8.27 9.41 10.15 9.90 Aug 7.46 8.10 9.23 10.09 10.00 Sep 7.53 8.12 9.33 10.12 9.91 Oct 7.49 8.12 9.69 10.35 9.72 Nov 7.35 8.29 9.68 10.75 9.53 Dec 7.38 8.44 10.18 11.10 9.58 Ave 7.41 7.84 9.38 10.29 10.19

Source: www.x-rates.com.

Chinese Yuan to buy 1 Euro (2001)

6.60

6.80

7.00

7.20

7.40

7.60

7.80

8.00



6.406.606.807.007.207.407.607.808.008.208.408.60



8.00

8.50

9.00

9.50

10.00

10.50


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9.209.409.609.80

10.0010.2010.4010.6010.8011.0011.20



8.50

9.00

9.50

10.00

10.50

11.00

11.50


Figure 4. Exchange Rates 2001-2005: Euro vs Russian Rouble

Average Rate: Russian Rouble to buy 1 Euro

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2001 2002 2003 2004 2005

Number of Russian Roubles required to buy 1 Euro

2001 2002 2003 2004 2005 Jan 26.65 27.00 33.83 36.40 36.65 Feb 26.36 26.84 34.16 36.06 36.40 Mar 21.11 27.25 33.96 34.99 36.44 Apr 25.76 27.62 33.89 34.99 35.97 May 25.45 28.65 35.72 34.79 35.49 Jun 24.87 30.01 35.58 35.26 34.67 Jul 25.17 31.32 34.50 35.67 34.55 Aug 26.46 30.87 33.87 35.63 35.02 Sep 26.86 31.05 34.48 35.69 34.74 Oct 26.77 31.13 35.27 36.34 34.33 Nov 26.50 31.89 34.87 37.13 33.92 Dec 26.89 32.44 36.18 37.37 34.17 Ave 25.71 29.70 34.70 35.85 35.17

Source: www.x-rates.com.

Russian Rouble to buy 1 Euro (2001)

0.00

5.00

10.00

15.00

20.00

25.00

30.00



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0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00



32.50

33.00

33.50

34.00

34.50

35.00

35.50

36.00

36.50



33.0033.5034.0034.5035.0035.5036.0036.5037.0037.5038.00



32.5033.0033.5034.0034.5035.0035.5036.0036.5037.00



Figure 5. Exchange Rates 2001-2005: Euro vs British Pound

Average Rate: UK Pound to buy 1 Euro

0.58

0.60

0.62

0.64

0.66

0.68

0.70

2001 2002 2003 2004 2005

Number of British Pounds required to buy 1 Euro 2001 2002 2003 2004 2005 Jan 0.63 0.62 0.66 0.69 0.70 Feb 0.63 0.61 0.67 0.68 0.69 Mar 0.63 0.62 0.68 0.67 0.69 Apr 0.62 0.61 0.69 0.66 0.68 May 0.61 0.63 0.71 0.67 0.68 Jun 0.61 0.64 0.70 0.66 0.67 Jul 0.61 0.64 0.70 0.67 0.69 Aug 0.63 0.64 0.70 0.67 0.69 Sep 0.62 0.63 0.70 0.68 0.68 Oct 0.62 0.63 0.70 0.69 0.68 Nov 0.62 0.64 0.69 0.70 0.68 Dec 0.62 0.64 0.70 0.70 0.68 Ave 0.62 0.63 0.69 0.68 0.68

Source: www.x-rates.com UK Pound to buy 1 Euro (2001)

0.600

0.605

0.610

0.615

0.620

0.625

0.630

0.635


UK Pound to buy 1 Euro (2002)

0.5950.6000.6050.6100.6150.6200.6250.6300.6350.6400.645



0.6300.6400.6500.6600.6700.6800.6900.7000.7100.720



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0.640

0.650

0.660

0.670

0.680

0.690

0.700

0.710



0.6550.6600.6650.6700.6750.6800.6850.6900.6950.7000.705


2.6. The British Pound The strengthening of the euro against the pound over the period 2001-2005 has not been as extreme as amongst the other currencies. In January 2001, GBP 0.63 exchanged for EUR 1.00, and by December 2005 the euro had strengthened to GBP 0.68, an increase of 7.9%. The Euro was strongest in May 2003 when GBP 0.71 exchanged for EUR 1.00. The fluctuating exchange rates between the pound and the euro are shown in Figure 5.

3. Tourist Flows to Europe 3.1. Introduction In order to assess whether the strengthening of the euro has had an effect on the flow of tourists to Europe, and in particular countries in the euro area, tourist flows from each of the five key-currency countries have been analysed: that is the United States, Japan, China, Russia and the United Kingdom. There are several inherent difficulties when undertaking such a task, most if which lie in the different ways countries (in particular those in Europe) measure tourist arrivals. There are four main units of measure being used:

• Arrivals at international frontiers of the country. • Arrivals at hotels and similar accommodation establishments in the country. • Arrivals at all types of accommodation in the country • Number of nights spent in all types of accommodation in the country

Although the different units of measurement allow changes in tourist activity to be assessed from one year to the next, they prevent aggregation except amongst countries using the same unit.


3.2. Arrivals from the United States Arrivals at all types of accommodation, from the United States, to the euro area countries (excluding Ireland and France which measure arrivals differently) declined from 10.1 million in 2001 to 8.7 million in 2003 – a decrease of 14.5%. Arrivals then started to grow again and reached 10.5 million in 2005, as shown in Table 1. Arrivals in France declined considerably over the period 2001-2005, and therefore when including this significant market, even though the base is different (arrivals are only measured at hotels and similar establishments) there was a reduction of around one million tourists between 2001 and 2005. Arrivals in the non-euro area countries also suffered a dip during the period 2001-2005, which was most extreme in 2003, although the decline was less severe. Outbound tourist statistics from the United States over the period 2001-2005 are heavily influenced by the terrorist attacks of 11th September 2001, the Gulf War in 2003, and to a lesser extend the outbreak of Severe Acute Respiratory Syndrome (SARS), also in 2003. Such major global events make it very difficult to identify more subtle influences of travel behaviour such as those generated by exchange rates. However, Figure 6 (below) shows percentage changes (year on year) for the exchange rate between the US dollar and the Euro (a negative indicates a strengthening of the euro – that is, one euro costs more US dollars), as well as changes in the number of tourist arrivals at euro area destinations (where these can be aggregated) and at non-euro area destinations. If there is a close correlation between euro exchange rate changes and tourist flows to the euro area, then the blue and red bars on the chart should point in the same direction. In Figure 6, there appears to be a correlation between the exchange rate and euro area tourist arrivals in 2002 and 2003, however in 2004, although the exchange rate improves only slightly for those in the US, there is a significant improvement in tourist arrivals, with the actual number of arrivals growing for the first time since before September 11th. Table 1. US Tourist Arrivals in All Types of Accommodation

2001 2002 2003 2004 2005 Euro area Austria 639,271 512,384 484,651 545,945 548,376 Belgium 325,971 301,280 274,906 288,709 292,050 Finland 101,035 90,272 82,822 93,484 87,054 France (2) 4,501,448 3,517,740 2,602,455 2,895,490 3,159,417 Germany 1,923,916 1,768,275 1,681,350 1,925,626 1,949,825 Greece 490,084 365,067 318,251 373,143 581,095 Ireland (1) 829,000 759,000 809,000 867,000 854,000 Italy 3,719,477 3,470,134 3,289,349 4,072,949 4,334,644 Luxembourg 26,135 24,356 20,587 22,056 23,113 Netherlands 993,000 886,000 830,000 905,000 971,000 Portugal 265,183 244,622 216,171 220,242 226,732 Spain 1,645,897 1,472,392 1,458,359 1,442,152 1,455,436 Euro area total 15,460,417 13,411,522 12,067,901 13,651,796 14,482,742 Not inc Ireland/France 10,129,969 9,134,782 8,656,446 9,889,306 10,469,325


Non-Euro area Denmark 73,861 65,582 66,014 110,464 122,892 UK 3,580,000 3,611,000 3,346,000 3,616,000 3,438,000 Sweden (3) 423,716 391,795 364,779 383,202 420,944 Non-Euro area (Ex Sweden) 3,653,861 3,676,582 3,412,014 3,726,464 3,560,892

Notes: (1) Arrivals at national borders. (2) Arrivals at hotels and other similar establishments. (3) Overnight stays in all types of accommodation establishments. Source: UNWTO. Figure 6. US: Percentage Change in Exchange Rate and Arrivals

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

2002 2003 2004 2005

% c

han

ge

Exchange Rate Eurozone Arrivals Non-Eurozone Arrivals

Therefore, for the United States, the link between the exchange rate and tourist arrivals in the euro area does not appear to be strong, although the rather extreme global events over the period 2001-2003 are likely to have masked any obvious effects the strengthening euro may have otherwise had. 3.3. Arrivals from Japan Over the period 2001-2005, tourist arrivals in euro area countries (with the exception of Ireland and France which measure arrivals differently) declined by an average of 3.9% per annum, although there was year-on-year growth in arrivals in 2002 and 2004 (if France and Ireland are included the trend is similar – declining by 2.8% per annum). Arrivals in non-euro area destinations also show almost alternating years of growth and decline.

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Table 2. Japanese Tourist Arrivals in All Types of Accommodation

2001 2002 2003 2004 2005 Euro area Austria 255,162 240,146 222,275 256,541 278,686 Belgium 140,057 154,138 114,452 126,523 111,985 Finland 82,317 74,173 69,063 70,694 70,434 France (2) 1,475,345 1,521,790 1,253,753 1,398,020 1,459,097 Germany 779,150 762,471 646,778 715,209 730,232 Greece 118,515 106,593 94,443 96,208 91,212 Ireland (1) 22,000 22,000 22,000 31,000 19,000 Italy 1,543,477 1,815,520 1,603,479 1,656,214 1,657,688 Luxembourg n/a n/a n/a n/a n/a Netherlands 183,000 187,000 139,000 164,000 158,000 Portugal 70,881 95,561 79,726 117,428 98,185 Spain 576,771 596,382 545,653 578,777 n/a Euro area total 5,246,675 5,575,774 4,790,622 5,210,614 4,674,519 Not inc Ireland/France 3,749,330 4,031,984 3,514,869 3,781,594 3,196,422 Non-Euro area Denmark 27,299 29,585 28,317 39,631 39,963 UK 289,000 320,000 273,000 242,000 269,000 Sweden (3) 130,350 137,598 109,557 118,177 114,935 Non-Euro area (Ex Sweden) 316,299 349,585 301,317 281,631 308,963

Notes: (1) Arrivals at national borders. (2) Arrivals at hotels and other similar establishments. (3) Overnight stays in all types of accommodation establishments. Source: UNWTO. Figure 7 (below) shows that in 2002, whilst the euro strengthens against the yen (meaning that it costs more yen to buy one euro) there is an increase in arrivals from Japan to euro area countries of over 7%. It is not absolutely apparent why this is, although following the events of September 11th, several Japanese tourists might have switched destinations from America to Europe.


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Figure 7. Japan: Percentage Change in Exchange Rate and Arrivals

-20

-15

-10

-5

0

5

10

15

2002 2003 2004 2005

% c

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In 2003, the euro strengthens further, and this time there is a decline in Japanese tourists to both euro area and non-euro area countries. The rate of strengthening of the euro against the yen slows down in 2004 and 2005, although the growth in Japanese arrivals to euro area countries is short lived (only in 2004), with a decline in numbers again in 2005. There is clearly no obvious correlation between the euro-yen exchange rate and tourist arrivals in euro area countries based on the data above, with the shrinking Japanese economy having a greater effect on the fluctuating demand for outbound holidays. 3.4. Arrivals from China China is still very much an emerging market, and therefore the travel patterns observed are very different to those of the more traditional markets such as the United States and Japan. The Approved Destination Status (ADS) is a program developed by the Chinese government to establish a well-managed, orderly and controlled system of travel abroad for its citizens. It is based on a bilateral agreement whereby a foreign government allows Chinese tourists to travel to its territory. Essentially, when a country achieves ADS, they can expect to experience an increase in the number of Chinese visitors who travel for leisure purposes. Most countries in Europe were only awarded ADS in 2004 (Austria, Belgium, Finland, France, Germany, Greece, Netherlands, Italy, Luxembourg, Portugal, Spain, Sweden and the UK) and therefore Europe is experiencing a significant increase in Chinese arrivals at present. Over the period 2001-2005 arrivals from China in the euro area countries (excluding France) grew by an average of 37.3% per annum.


Table 3. Chinese Tourist Arrivals in All Types of Accommodation

2001 2002 2003 2004 2005 Euro area Austria n/a n/a n/a 172,361 176,777 Belgium 62,037 112,652 107,016 114,456 1,087,702 Finland 24,992 44,577 40,755 49,384 37,435 France (2) n/a n/a n/a n/a 472,296 Germany 237,183 270,459 268,057 387,375 418,235 Greece n/a n/a n/a n/a 26,699 Ireland (1) n/a n/a n/a n/a n/a Italy 393,543 531,449 480,225 727,647 724,444 Luxembourg n/a n/a n/a n/a n/a Netherlands n/a n/a n/a 82,000 96,000 Portugal 9,963 10,662 9,844 15,870 16,577 Spain n/a n/a n/a n/a n/a Euro area total 727,718 969,799 905,897 1,549,093 3,056,165 Euro area not France 727,718 969,799 905,897 1,549,093 2,583,869 Non-Euro area Denmark n/a n/a n/a n/a n/a UK 286,000 275,000 327,000 311,000 334,000 Sweden (3) n/a n/a n/a 23,047 70,097

Notes: (1) Arrivals at national borders. (2) Arrivals at hotels and other similar establishments. (3) Overnight stays in all types of accommodation establishments. Source: UNWTO. Figure 8. China: Percentage Change in Exchange Rate and Arrivals

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China is too new a market to be able to assess in terms of the impact of the exchange rate of the euro on the yuan with other variables such as ADS having a greater impact. Improved living standards and prosperity is also enabling more Chinese to travel abroad. Figure 8 clearly shows that despite a small decline in arrivals in 2003, growth has been considerable against the background of a strengthening euro, although in 2005 the trend was reversed slightly. 3.5. Arrivals from Russia Arrivals to euro area countries (excluding France) from Russia have increased from 1.2 million in 2001 to 1.5 million in 2005, and average growth rate of 5.7% per annum (the inclusion of France makes little difference, generating an average growth rate of 5.9%). This represents strong growth over the years 2004-2005, as there was little or no growth during 2002 and 2003. Table 4. Russian Tourist Arrivals in All Types of Accommodation

2001 2002 2003 2004 2005 Euro area Austria n/a n/a n/a n/a 109,818 Belgium 33,535 33,039 34,061 37,700 49,176 Finland 204,459 215,159 194,388 190,190 221,088 France (2) 258,070 313,342 325,985 301,435 339,305 Germany 252,611 270,138 276,781 292,840 319,026 Greece n/a n/a n/a n/a 166,989 Ireland (1) n/a n/a n/a n/a n/a Italy 352,370 360,373 381,340 453,064 518,828 Luxembourg n/a n/a n/a n/a n/a Netherlands 57,000 48,000 53,000 61,000 69,000 Portugal 27,318 27,369 25,762 33,997 32,022 Spain 263,497 218,423 210,765 224,973 Euro area total 1,448,860 1,485,843 1,502,082 1,595,199 1,825,252 Euro area not France 1,190,790 1,172,501 1,176,097 1,293,764 1,485,947 Non-Euro area Denmark n/a n/a n/a n/a n/a UK n/a n/a n/a n/a n/a Sweden (3) 84,444 114,054 113,137 132,016 132,536

Notes: (1) Arrivals at national borders. (2) Arrivals at hotels and other similar establishments. (3) Overnight stays in all types of accommodation establishments. Source: UNWTO. Over the period 2001-2002 and 2002-2003, the euro strengthened considerably against the rouble, which means that Russians had to spend more roubles to buy one euro. During this period there was little or no growth in arrivals of Russians in euro area countries, as shown in Figure 9.

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Figure 9. Russia: Percentage Change in Exchange Rate and Arrivals

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Exchange Rate Eurozone Arrivals

However, in 2004 the strengthening of the euro against the rouble slowed down and in 2005, it weakened against the rouble. During these two years, arrivals to euro area countries increased considerably. There is no proof that the exchange rate caused this fluctuation – it is more likely to have been due to the rising levels of disposable income following strong growth in Russian economy, together with growing confidence following the end of Saddam Hussein’s regime in Iraq, or due to a number of domestic issues in Russia itself. However, there does appear to be a reasonably logical correlation between the euro-rouble exchange rate and visitor arrivals in euro area countries. 3.6. Arrivals from the UK Over the period 2001 to 2005, the number of UK tourists visiting the euro area countries has increased from 41.8 million to 44.2 million, representing a modest average annual growth rate of 1.4%. Similarly, arrivals from the UK to countries in the non-euro area grew by an average annual rate of 1%, as shown in Table 5. The strengthening of the euro against the pound in 2002 and (in particular) in 2003, as shown in Figure 10 appears to have had no effect on the growth of arrivals in euro area countries from the UK over the same period, although it could be argued that the growth rate of around 3% would have been significantly higher if the exchange rate had been more favourable. In 2004, there was a weakening of the euro against the pound, however at the same time there was a stagnation of the number of tourists travelling from the UK to euro area countries (i.e. no significant change in numbers). In 2005, the euro strengthened slightly, and the number of tourists to euro area countries also declined. These findings for the UK do not correlate to what might be expected, at least for the period 2002-2004, thus indicating that either the exchange rate between the euro and the pound has no or little impact on tourist flows from the UK to euro area countries, or that other factors are obscuring any impacts that are occurring.


Table 5. UK Tourist Arrivals at International Borders

2001 2002 2003 2004 2005 (000) (000) (000) (000) (000) Euro area Austria 569 725 619 781 769 Belgium 1,738 1,784 1,964 1,799 1,733 Finland 167 146 174 183 146 France 11,959 12,112 11,957 11,602 11,094 Germany 2,242 2,275 2,140 2,336 2,493 Greece 3,215 2,958 2,857 2,709 2,435 Ireland 3,930 3,965 3,913 4,125 4,221 Italy 2,471 2,650 2,905 2,974 3,374 Luxembourg 69 74 88 95 110 Netherlands 2,095 2,149 2,145 2,165 2,174 Portugal 1,598 1,779 1,891 1,804 1,855 Spain 11,790 12,525 13,763 13,833 13,837 Euro area total 41,843 43,142 44,416 44,406 44,241 Non-Euro area Denmark 309 302 292 356 337 Sweden 413 379 381 375 414 Non-Euro area Total 722 681 673 731 751

Source: International Passenger Survey. Figure 10. UK: Percentage Change in Exchange Rate and Arrivals

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4. Effects of Currency Changes on Travel Patterns 4.1. Introduction A large number of studies have been attempted to determine the effect of exchange rates on tourist demand, with varying results. In some studies, the demand for international tourism was found to be highly exchange rate elastic (i.e. changes in the exchange rate between two countries triggered large changes in tourist flows), yet other studies have demonstrated low elasticities. Further, the statistical significance of exchange rates as a determinant of tourism demand has been found to be highly variable. Indeed, a study by the Economic Intelligence Unit (EIU)1 on the impact of exchange rate fluctuations on tourism concluded that “it is probably that it is only in a stable world where all things remained equal from one year to the next, that changes in exchange rates would have a measurable impact on tourist choice”. Most of these studies have examined tourism between pairs of origin and destination countries over time, although a smaller number have examined the pattern of demand across a range of countries rather than time – the theory being that tourist flows are affected by more than just one exchange rate between two currencies (that is, a tourist may choose country A over country B not because the exchange rate with country B is particularly unfavourable, but because the exchange rate with country A is exceptionally favourable). Some studies have shown that different countries are affected to different degrees by exchange rate fluctuations, i.e. we all react differently. For example a study by the Canadian Tourism Commission (CTC)2 showed that a 10% strengthening of the Canadian dollar against the US dollar generates a 16% increase in Canadians’ overnight travel to the United States. However, a 10% strengthening of the US dollar against the Canadian dollar only increases Americans’ overnight travel to Canada by 4%. A recent study on the effect of Economic and Monetary Union (EMU)3 on tourism has concluded that the elimination of the exchange rates between euro area countries has not been particularly significant in changing the flow of tourists between these countries. This finding is consistent with the findings of studies that have assessed the impact of exchange rate changes on other industries, which have proved to be inconclusive. The EMU effect on tourism seems to be mainly focussed on other factors such as the elimination of transaction costs arising from the need for exchanging different currencies, the increase in market transparency, and the expansion of business tourism as a consequence of the positive impact of the EMU on trade.

1 Economic Intelligence Unit (1975). Currency changes, exchange rates and their effects on tourism. International

Tourism Quarterly, Special Article No. 18, 4, 34-45. 2 http://www41.statcan.ca/4007/ceb4007_001_e.htm (accessed 01/04/07). 3 Review of International Economics (2007), The Effect of EMU on Tourism, Volume 15, Issue 2, 302-312.

http://www41.statcan.ca/4007/ceb4007_001_e.htm


4.2. Key Determinants of Tourist Flows It is important to remember that the factors that affect tourist flows are highly complex. Whilst fluctuations in exchange rates affect the price of tourist trips, other important price factors include the cost of living and cost of tourism services in the destination, and the cost of transportation between the origin and destination. Many studies have tried to evaluate the separate effect of these three components (exchange rate, cost of living/services, and price of transport) on the basis that tourists might respond differently to each. In particular, it has often been suggested that tourists are well informed on exchange rates but have much less knowledge of price levels in the destination they are visiting. Tourists may base their decisions prior to departure on knowledge of exchange rates, but might alter their intended length of stay and level of spending on arrival as they adjust to local currency prices. Other travel determinants, such as unexpected events, can cause substantial changes in the tourism economy – and there are several key examples over the period 2001-2005. The events of September 11th had a significant impact on global tourism, as did the war in Iraq in 2003 and the SARS outbreak in the same year. These events can have such a significant impact of tourist flows that they obscure more subtle changes caused by shifting exchange rates. 4.3. Key Exchange Rate Impacts Previous studies have identified a number of impacts of unfavourable exchange rates. These include:

• Less travel abroad or to countries with a different currency.

• Travel to different destinations: exchange rate fluctuations tend to have a greater effect on short haul travel (and even more so on day trips) than long haul travel. Countries that attract a high proportion of long haul tourists (such as Australia) have observed that the impact of exchange rate fluctuations is limited. Whilst the exchange rate can have an impact on how much money is spent at the destination, the actual travel decision, which is generally made months in advance, tends not to be affected.

• Tourists are more likely to reduce their length of stay or average daily expenditure rather than decide not to visit a destination.

On the contrary, various reverse effects have been observed resulting from a favourable exchange rate. These include:

• Spending on additional goods and services.

• A shift in travel and spending from other destinations.

• Attraction of new tourists – that is people who would not have travelled otherwise.

• Attraction of border shoppers (persons living close to another country travelling for the purpose of shopping).

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4.4. Impacts of Currency Changes in Europe The analysis of the exchange rates and tourist flows over the period 2001-2005 in Section 3 of this Briefing Paper shows that there is no conclusive evidence that the increasing strength of the euro over the period had a negative impact on inbound tourism from the key source markets identified. There are several reasons for this, the most prominent is the significance of other factors that influenced tourism over this period: September 11th, the Gulf War and SARS. The impact of these makes it almost impossible to identify any individual trends due to exchange rate fluctuations. There are a number of national tourism administrations across Europe that have claimed the weak US dollar (in particular) is costing the tourism sector a considerable amount of revenue. However, most of these comments are anecdotal as it is difficult to strictly evaluate the impact that the exchange rates have had whilst excluding all the other factors. 4.5. Policies and Actions to Respond to Exchange Rate Fluctuations There do not appear to have been any reactions to changing exchange rates between the euro and other key global currencies at an institutional level. National and regional tourism administrations in Europe have not set out any policies or action plans to respond to adverse or positive exchange rates. The reason for this could, in part, be the lack of conviction of the impact exchange rates have on tourist flows. However it is almost certainly also due to the complex factors that determine tourist demand, and that it is just one aspect amongst many of which the relevant administrations have little control. Nevertheless, it is common for the tourism trade (such as tour operators) to establish their contracts with fixed exchange rates so that they are not at the mercy of constantly shifting rates. 4

4 A number of studies are referred to in this section. A good reference point for all the key studies undertaken up to

1975 can be found in Economic Intelligence Unit, Currency Changes: Exchange Rates and their Effects on Tourism; International Tourism Quarterly, Special Article No. 18, 4, 34-45. More recent studies are referenced in Review of International Economics (2007), The Effect of EMU on Tourism, Volume 15, Issue 2, 302-312.


5. Recommendations Whilst the national and regional tourism administrations may not be able to control exchange rates, there are various policies and procedures they could put in place to minimise the effects of a strong euro and maximise the effects of a weak one. Minimise the effects of a strong euro:

• Target those markets that are less sensitive to exchange rates. These are typically business travellers, long haul holiday tourists, and those tourists buying high quality products (in particular tailor-made trips and five star hotel seekers – these are less likely to be concerned about the exchange rate).

• Increase marketing activities whilst the exchange rate is favourable. Whilst a strong

currency means that inbound tourist may be discouraged from travelling, it does provide the opportunity for both the national and regional tourism authorities of a country, as well as the private sector, to buy more advertising space and other promotional activities in the markets they are attempting to attract for an unchanged amount of euros (or alternatively buy an unchanged amount of advertising space or promotional activities for fewer euros).

• Do not rely on one key market. By developing a broad range of source markets for tourists,

the overall impact on the tourism industry due to an adverse exchange rate with one or two other countries will be minimised.

• Make your destination unique. A destination that is unique will be less affected by changes

to exchange rates than destinations that differ little from other alternatives. Maximise the effects of a weak euro:

• Attract border crossers and day-trippers (or the short break market) – essentially these will be residents of non-euro area countries such as (at present) the UK and Switzerland – through targeted marketing campaigns highlighting the benefits of shopping and leisure trips.

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Bibliography Canadian Tourist Commission website: http://www41.statcan.ca/4007/ceb4007_001_e.htm (accessed 01/04/07). Economic Intelligence Unit (1975). Currency Changes, Exchange Rates and their Effects on Tourism; International Tourism Quarterly, Special Article No. 18, 4, 34-45. Foresight (2005), VisitBritain, Issue 15, January International Passenger Survey website: http://www.statistics.gov.uk/ssd/surveys/international_passenger_survey.asp Review of International Economics (2007). The Effect of EMU on Tourism. Volume 15, Issue 2, 302-312. Tourism Sector Monitor (2003), Special Focus: The Effect of Exchange Rate Movements on Cross Border Travel, British Colombia Stats, September 2003. The Journal of Tourism Studies (1993), Currency Exchange Rates and the Demand for International Tourism, Geoffrey Crouch, Vol 4, No 2. Tiago Stock Consulting website: http://www.x-rates.com/. United Nations World Tourism Organization (UNWTO) statistics website: http://caliban.wtoelibrary.org/vl=2135673/cl=21/nw=1/rpsv/home.htm. Visit Scotland Research Bulletin (2006), Dollar Exchange Rate Impact on Inbound Tourism, December.

http://www41.statcan.ca/4007/ceb4007_001_e.htm

http://www.statistics.gov.uk/ssd/surveys/international_passenger_survey.asp

http://www.x-rates.com/

http://caliban.wtoelibrary.org/vl=2135673/cl=21/nw=1/rpsv/home.htm

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