Tuesday, December 20, 2011
Weaker euro will help solve Europe deficit woes
December 19, 2011
The large current account deficits of Italy, Spain and France can be reduced without lowering their incomes or requiring Germany to accept inflationary increases in its domestic demand. The key is to expand the net exports of those trade deficit countries to the world outside the eurozone.
Those current account imbalances are the result of imposing a single currency on 17 eurozone countries. If their exchange rates were free to vary, normal market pressures would cause the currencies of Italy, Spain and France to decline relative to Germany’s, stimulating exports and reducing their imports while also shrinking Germany’s trade surplus.
The politicians who planned the euro generally did not think about future current account imbalances or other economic problems. They wanted the euro as a means of accelerating political integration.
Although the exchange rates at which countries entered the eurozone were negotiated to avoid initial trade imbalances, different future rates of wage increase would inevitably lead to trade imbalances. Those politicians and bureaucrats who recognised this problem believed that the single currency would somehow eliminate it by causing productivity trends to converge.
Posted by Yulie Foka-Kavalieraki at 9:57 PM