Wall Street Journal
July 16, 2012
The euro has fallen to multiyear lows against almost all of its trading partners as the crisis has engulfed Spain, the euro zone's fourth-largest economy, but what would in normal times be a boon for the region may not help as much now, experts say.
Before the crisis, actions such as the European Central Bank rate cuts two weeks ago would have had a twofold effect in reviving the economy: Banks would have passed the lower rate on to their clients, while foreign-exchange markets would have marked the currency down, giving exporters better chances to sell their products abroad.
In today's polarized euro zone, it isn't that simple. For one thing, tThere is no certainty that euro-zone banks will pass on the cut in borrowing costs. ECB President Mario Draghi said at his news conference two weeks ago that he didn't expect banks' behavior to change much as a result of the cuts. Even if they did, he explained, the euro zone's problems are now so acute that few companies seem to want to borrow.
Still, if borrowing costs aren't falling, a currency depreciation should itself have a stimulative effect and would be worthwhile even if it annoyed trading partners, some economists say.