11th May 2012
But, as one dissenting voice on the FT site points out, the Euro has depreciated by around 10% against sterling since the French elections. Given that the Eurozone crisis was, at its heart, a currency problem, does the falling currency offer any respite for embattled Eurozone policymakers?
Dave says: "the exchange rate of the euro toward dollar was a problem for exporters. Could someone tell me why (it is not a good solution) that the euro is (now lower) against the dollar?"
Countries usually get themselves out of a debt crisis through the devaluation of their currency. The Euro was kept high by the relatively strong economic performance of stronger Eurozone countries such as France and Germany. This was bad news for Greece and other weaker countries, leaving them the equally unlikely options of implementing austerity or generating growth if they wanted to remain in the single currency.
Shaun Richards has picked this up in his blog, suggesting the weakness might provide a boost to the overall economic outlook for the peripheral Eurozone counties: "One point often ignored is that a weak Euro will help the economies of the periphery if it is sustained. Furthermore it is an example of a market mechanism acting in a self-correcting way which is rather refreshing after all the government and central bank interference of these times."
In this BBC article, Philippe Legrain, independent economic adviser to European Commission President Barroso points out that a weaker euro would help Mediterranean economies regain competitiveness for price-sensitive exports: "A more competitive currency would be welcome: just as sterling's collapse since 2008 has lifted UK exports."
But this view is contentious. This Wall Street Journal blog says that there are significant disadvantages to a weak Euro, most obviously the increased cost of vital imports: "While a drop in the euro might boost exporters' coffers, it could also bring its own disadvantages, particularly by boosting the cost of oil imports.
"The price of oil futures in euros has tumbled since peaking at a record high of €95 a barrel in March, thanks largely to a decline in the price of oil generally. But it hasn't fallen far. Friday, the rate is hovering at €90. It isn't hard to imagine supply concerns resurfacing-a development that would be exacerbated by a euro slide. And the pain is far from over for European consumers. While the price of oil on the wholesale market may have come down, this hasn't yet been reflected at the pump."
The strongest advantages of a weak Euro are likely to be seen by those with higher exports than imports. The trouble is, as these Eurostat statistics show, this isn't any of the countries that are in crisis. Germany has a huge surplus of exports over imports. The Netherlands, Belgium and Ireland also have a surplus.
The weaker countries – those importing more than they are exporting – are, predictably, Greece, Spain, France, Italy and Portugal. Although a weaker Euro may push up the price of imported goods and force them to look domestically over the long term, in the interim it may act as a further drag on growth.
The other question is whether the Euro is depreciating against the ‘right' currencies. Articles have tended to look at the Euro's position in relation to sterling, but overall, the UK is not the most important trading partner. The relative value of the Euro versus the dollar is more important, but also against the Swiss franc and the Chinese Renminbi.
The Euro has slipped against the dollar, but the market is increasingly characterised by inactivity: "Then there is the strength of the euro in the face of fundamental valuations and most analysts' predictions…For much of the year the euro has traded in a tight range against the dollar. Tired of losing money betting that the single currency would fall last year, hedge funds have been avoiding the market altogether."
In other words, the weakening Euro may well provide a boost only to those areas that were already relatively strong. A strong Germany is in everyone's interests, but it does not solve the problems for peripheral Europe. The weakening Euro is unlikely to provide the answer to the Eurozone woes.
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