the falling euro

In the past year, the euro has fallen from US$1.44 to less than US$1.21. Harvard economist Martin Feldstein would like to see it fall further, to near parity with the US dollar. The euro would still be above its historic low of 84 US cents, and depreciation would provide a much needed boost for Spain and other troubled eurozone economies. I agree.

A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone. The weaker euro would also boost Germany’s net exports, raise German wages and prices and reduce the trade imbalance within the eurozone.

The increase in peripheral country net exports would also raise their gross domestic product and so reverse their recessions that were caused by higher taxes and cuts in government spending. ….

In recent weeks I have discussed the case for a declining euro with current and former eurozone officials. I expected that they would just say that I am a long-time “eurosceptic” who is always critical of the euro. But the opposite happened. These eurozone experts all agreed that a lower value of the euro is necessary for the survival of the single currency.

Martin Feldstein, “A rapid fall in the euro can save Spain“, Financial Times, 25 July 2012.

Update: Martin Feldstein published another column on the same subject last month in the US edition of The Wall Street Journal (28 June 2012), with the title “A Weaker Euro Could Rescue Europe“. The column is not gated, and there are 21 comments, many of which oppose devaluation of the euro.

 

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