The fall of the euro: a sign of weakness, but an opportunity for the European economy
This is the title of a recent article in the French Les Echos. And this goes directly to my recent commentaries about competitive currency devaluations as a potential course of action going forward. It seems likely that the depreciation of the Euro is a pre-meditated course of action.
Here’s what Les Echos had to say about the European opportunity (my translation):
If the single European currency has stopped its fall on Monday, it has stabilized at its lowest level since April 2006. A situation that reflects the current climate of investor confidence vis-à-vis the Old Continent. But most economists see this as an opportunity, because the competitiveness of Europe is improving.
And five. The euro had its fifth consecutive day of declines on Monday. A fall, certainly, but a very reasonable 0.3%. Nothing dramatic in itself, the euro did not fall below 1.2235 dollars. But that puts the single European currency at its lowest level since April 2006. The current uncertainty surrounding the European economies, and especially the fact that the entire Old Continent will not escape a severe fiscal adjustment in the coming years, appear to have made investors cautious about the longevity of the single currency. Its status as a reserve currency is beginning to suffer. To wit, on Monday, the Russian information agency Interfax reported that Russia has decreased the share of the euro in its foreign reserves from 47.5% to 43.8% between the end of 2008 and the end of 2009.
The blow is hard for the pride of Europeans. However, in the small world of economists, a consensus is emerging considering whether the current volatility of the euro is necessarily detrimental to Europe. The decline of the euro, in absolute terms, however, is "one of the rare pieces of good news these days", said Jean-Michel Six, European economist at Standard & Poor’s (S&P). He notes pointedly that what is happening is exactly what critics of the euro thought impossible because of the single currency, a de facto devaluation of the currencies of European countries. Greece, in particular, will not need to leave the euro to regain competitiveness, since the fall of the euro has already achieved this goal.
Strong export growth in several countries
If 60% to 65% of exports from European countries are destined for the EU, there remains about 40% of exports that go to the rest of the world and therefore present a better "competitive price". Theoretical studies on the impact of a weaker euro on European exports "converge towards the idea that a 10% decline in the exchange rate results, after two years, in an increase of 5 percentage points of exports. This increases the gross domestic product by 1 percentage point over the same period ", notes Jean-Christophe Caffet, economist at Natixis.
The reality: is it in line with the theory? For Enam Ahmed, senior economist in charge of Europe at Moody’s, it is not in doubt: "Recent statistics show that the exports of the three main economies of the eurozone, Germany, France and Italy, are currently taking advantage of the decline of the euro. Other countries are experiencing the same trend, in particular Spain and Ireland ". In all these countries, to which Portugal might be added, the first quarter was characterized by a strong rise in exports. Germany, an exporting economy par excellence, is not alone in benefiting from the weak euro. In France, the first quarter resulted in a boom of 16% of exports to Asia, and 23% to ASEAN.
A flat, the price of imports will increase
At the sectoral level, it is "capital goods and investment which are generally the most sensitive to currency fluctuations", says Laurent Bilke, European economist at Nomura. Most manufacturing exporters should benefit from the current situation. To these we must add aircraft [manufacturers], which had been hit by the rise of the euro. Faced with a competitor, Boeing, situated in the dollar zone, Airbus now finds itself in a currency position that is exactly in the middle of where it had been at the inception of the euro.
So there is something salutary in this currency adjustment, which comes at a time when demand is booming in emerging markets. That is the particular point of view of Laurent Bilke. Note that at this time when the largesse of states is no longer great and countries like Spain and Ireland have seen their internal economic engine crash. "Europe has more need than ever to begin exports to restart its economy".
This is obviously a double-edged sword: the price of imports will increase. This could push up inflation if the raw materials sustained increase. Jean-Christophe Caffet says that even if [the price of] a barrel of oil is falling again, [we should hope] that austerity policies in Europe do not coincide with a surge of inflation, because "it is social cohesion that could suffer".
Currency debasement is in full effect. Also see John Hussman’s Two Choices: Restructure Debts or Debase Currencies for more on the same issue.
Photo: AFP / Louisa Gouliamaki