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Weak euro may be dangerous

Rolf Wenkel / hgMarch 13, 2015

The euro looks bound to reach parity with the greenback in the not-too-distant future, decreasing deflationary pressure as a boon to exporters. But experts have started warning of a "currency war."

Euro coins on euro banknotes Photo: Federico Gambarini/dpa
Image: picture-alliance/dpa/F. Gambarini

It only seems a matter of time before the euro reaches parity with the US dollar for the third time in its history. The euro's downslide has accelerated since the decision of the European Central Bank (ECB) to pump 60 billion euros ($63.5 billion) into the markets each month. The single currency may even drop below parity.

One might argue that a weak euro is a welcome phenomenon as goods made by European exporters get cheaper on global markets, making producers more competitive. On top of that, a devaluated euro is like importing higher inflation through the back door and keeping deflationary woes at check. But if one of the major import items, notably oil, gets cheaper too, the effect of a euro in freefall is rather limited. Moreover, the ECB is not mandated to foster exports by exchange rate policies.

The president of the Federation of German Wholesale, Foreign Trade and Services (BGA), Anton Börner, has this to say: "ECB President Mario Draghi says Italians and Spaniards cannot export more because of the strong euro - so, I'm going to make the euro weaker. But that way German goods become less expensive too, and do you really believe that a lot of people will buy a Fiat, Peugeot or Citroen, if they can get a German car, which is now also 20 percent cheaper?"

The euro's career started as a deposit currency on January 4, 1999, at a value of $1.1747. By October 2000, you could get only $0.82 for a euro and there were growing fears the weak euro could destabilize the global economy. But the smooth introduction of the euro as cash - available to citizens as of January 2002 - changed the picture completely. Parity was reached again on July 15 in the same year, while in July 2008 the single currency hit a record $1.6038.

The Yellen effect

But now the euro is only going one way: down. And nothing seems to be able to stop the freefall, which the US central bank's monetary easing policy has contributed to. Fed officials around Janet Yellen may pave the way for the first rate hike since the onset of the global financial crisis. Most pundits expect the greenback to keep rising even before a change in the fed's interest rate policy.

The euro has taken a blow specifically due to the debt crisis in the 19-member bloc. Investors are being put off by a seemingly never-ending spat between creditors and a Greece fighting for financial survival. A weak euro is particularly harmful for the crisis-hit southern eurozone nations, argues Stefan Kooths of the Kiel Institute for the World Economy (IfW).

"Imports are getting more expensive, and economies such as Greece, which don't have a solid industrial base, are worse off as people's purchasing power gets whittled away even further," Kooths told DW.

Germany for its part has been profiting from the euro's downslide. For the world's second largest export nation, a weaker euro is like an economic stimulus plan. Multinational companies, which do most of their business abroad, can sell the products made at home much better abroad. Eurozone countries such as Spain, Portugal or Greece, which are not major exporters, stand to profit little from a weaker euro, meaning that economic prospects for individual member countries couldn't be any more different.

Depreciation race in the pipeline?

"The moment nations outside the eurozone start artificially weakening their own currencies, we might get stuck in a depreciation spiral, but that would be the last the world economy needs as it would boil down to global economic chaos," Kooths warned.

BGA President Anton Börner agrees that exchange rate policies cannot take the place of real structural reforms, hinting at what he sees as the lack of competitiveness in the southern eurozone nations.

"The ECB has opened a door through which a currency war may sneak in," Börner maintained. "That's a move that's destroying global trust in a stable currency and jeopardizes European cohesion."

Depreciation is not just a welcome stimulus program, Kooths agrees. "Yes, there may be positive short-term effects," he said. "But long-term, a weak currency is anything but a suitable tool to secure growth and prosperity."