The future of euro – inside story

Exchange rate euro will be under constant pressure

In brief: The future of euro looks extremely ambiguous. The growing problem of the European Union does not cause trouble breathing single European currency. The dollar strengthened, the euro is losing ground.

Euro falls, the future of euro worries every European. Is the single currency project will end in failure? Do not make hasty pessimistic conclusions. In fact, the skillful use of a situation, the depreciation of the euro can be used as a successful addition to the necessary fiscal consolidation in Greece and other countries of southern Europe. Ironically, the weak euro – is a necessary condition for its survival. We market our erring ways of instruction on the right path. Unfortunately, not always the most humane.

Investors are selling the euro, out of fear, not knowing what is in it and there is a solution. Yet it is worth remembering that markets never aspire to the tragedy, and mitigate natural clumsiness and sharpness of the market events during periods of mass delusion – it is a matter of politicians. First of all, a weak euro countries of southern Europe need. It is their problem questioning the viability of monetary union. On everyone’s lips especially Greece, but Spain, Portugal and Italy are also in distress because of the sharp loss of competitiveness. In Greece there are two options: to repeat the experience of Ireland in 1982, or to repeat the experience of Ireland in 1987. In 1982, in the midst of the most severe recession, when the national debt in the country grew by 5% of GDP in the year, Ireland has reduced the budget. As a result, only worsened the recession, and the growth rate of debt has increased. In 1987, Dublin has made another attempt. At this time, fiscal consolidation has been much more successful. By 1989, the ratio of debt to GDP has fallen steadily, while the volume of production grew by 4% a year. So what’s the secret? First and foremost, you should pay attention to the composition of fiscal adjustment – in 1982 it was based on raising taxes on the consequent reduction in costs. The European bailout plan is very similar to Greece of Ireland. But there is one important addition. In 1982, the Irish pound strengthened, and in 1987, just before the successful stabilization, it has depreciated by 11%.

The same thing happened in Italy in 1990, during the fiscal stabilization before entering the Eurozone. And in Argentina in 2001. But how to bring Greece, which straitjacket called the euro? Greece is a member of the Eurozone, so assumed that it is one way to restore competitiveness – through recession and deflation. But this is not true. There are plenty of opportunities to euro decline against the dollar and the currencies of developing countries. Such a devaluation would not have a direct negative impact on the euro area as a whole, because the majority of countries conduct trade within the region. But, by a happy coincidence, Greece deals with the “outside world”. Even including Sweden and the UK, two countries whose currencies may follow the example of weakening the euro, the ratio regioanlnoy and external trade of Greece is 50%. Depreciation of the euro by 30% will significantly reduce the trade deficit of Greece and to increase exports. The fact is that 70% of Greek exports are tourism. This industry is very sensitive to price changes, while one in three tourists who come to Greece from non-European countries. Greek debt is denominated mostly in euros, which excludes the probability of a sharp rise in debt in the Argentine style, and removes the main obstacle to the use of currency depreciation as a tool for recovery. Do not expect lower profits, and Germany, 40% eksportakotoroy occur in countries outside the euro area. Germany does not need an extra incentive to increase competitiveness or on the export sector. Therefore, it can take advantage of a weak euro to strengthen domestic demand, which, in turn, will strengthen the positive effect of growth of net exports to troubled parts of the euro area. Policy makers should promote the depreciation of the euro, and not to disturb him. Useless intervention of the European Central Bank will be only the latest nail in the coffin for the euro. Central Bank must lower interest rate to the barest minimum and to announce his intention to leave it there for ever. In conjunction with the necessary fiscal adjustments, these actions will bring the desired result.

Anrey Torbinski
2010-05-29 11:28, Economics.

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