Tuesday, March 23, 2010

The Weak Euro...Really?

That the much publicized fiscal troubles in some of the Eurozone countries recently have caused the euro to lose ground in the foreign exchange markets is obviously not in question. However, arguing that a fairly moderate decline in the value of the currency from a historically very high level of about four months ago is a dramatic development that is likely to reshape the landscape of the global competitiveness of certain eurozone countries' exports (and more specifically, Germany's) is a bit of an exaggeration and reflects a disregard for the history of the currency since its inception.


In January 1999, the euro was introduced at a rate of 1.16 against the U.S. dollar and suffered a significant erosion in its value, trading mostly within a 0.80 to 1.0 range against the U.S. currency in the following three years. Since then, it has been on a broad uptrend, reaching a high of 1.60 against the dollar in the summer of 2008, just prior to the financial crisis triggered by the Lehman affair. The most recent stage of its pullback, in the wake of the acute fiscal problems in the southern European countries, has still left the euro at historically high levels- about 10% higher than a year ago (Chart below).

The Euro vs. U.S. Dollar

Source: ECB

The euro remains at the upper end of the range that has prevailed against the dollar since its inception and it can be reasonably argued that its latest slide represents a relatively limited correction from unsustainably high levels it had reached last fall (and, which, Jean-Claude Trichet had repeatedly denounced at the time as not consistent with the underlying fundamentals in the eurozone but rather the result of excessive speculative activity that had pushed it to unjustifiably high levels).

It is, understandably, a welcome development for certain heavily export-oriented countries in the eurozone that the currency has retreated moderately in recent months. But, casting it as a a critical factor making countries like Germany a major export powerhouse is a misrepresentation of basic facts.

Germany had been steadily establishing itself globally as a major export-oriented economy (running the biggest trade surpluses in the world for years until it was recently surpassed by China) even during the period when the euro had been steadily rising earlier in the last decade. It is primarily through the competitive cost advantages related to the containment of real wages and increased productivity that the German economy has achieved this status and not because of any benefit related to a "weak currency".

Anthony Karydakis