By Geoffrey Smith
The euro has fallen to multiyear lows against almost all 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. Higher sales
could be achieved, and it would cost less to invest in producing more.
In today's polarized euro zone, it isn't that simple. For one thing,
there 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, Mr. Draghi
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.
"Even if there was a depreciation vis-a-vis the dollar, I still think
it would be a good thing," said Oliver Blanchard, chief economist with
the International Monetary Fund, on Monday. "In a way Europe needs it
more than the U.S., and the U.S. could probably offset it in some
way."
The IMF has been warning for some time that the euro crisis is the
biggest single threat to the global economy, and so the rest of the
world has an interest in letting the euro zone depreciate itself back
to life, he argued.
The IMF earlier Monday shaved its 2013 growth forecast for the euro
zone to 0.7% from an earlier forecast of 0.9%. It kept with its
forecast of a 0.3% contraction this year.
A drop of 10% in the euro's exchange rate would normally give a
one-time boost of 1.4% to gross domestic product, Mr. Blanchard said.
Exporting one's way back to recovery works better when your trading
partners' economies are in good shape. Instead, growth is slowing even
in the emerging markets that have driven the global economy in recent
years. Exports from Ireland, one of the most open economies in the
euro zone, were down on the year in May, even though the euro has
fallen some 10% on the year and is at a four-year low against
sterling, the currency of Ireland's largest trading partner.
Mario Boselli, chairman of the Italian Chamber of Fashion, frets that
larger emerging economies still only account for 10% of total Italian
exports. "This is not enough" to offset the weakness in developed
economies, he says.
Both Mr. Boselli and Philip Halpin, an adviser to the Irish Exporters'
Association, say the euro would have to fall as low as $1.10 (from
about $1.22 currently), to produce a robust export-led recovery.
Ludovic Subran, chief economist at French trade-credit insurer Euler
Hermes, warns that might not be enough. Such a depreciation would have
little effect in France because high taxes and rigid labor costs
reduce the potential benefits, he says.
"For France to really benefit from the slight depreciation you need a
supply shock to ensure export-price elasticity is higher than it is
right now," Mr. Subran said.
Another problem: With the exception of Ireland, the countries that get
the most benefit from such a decline are those most exposed to trade
outside the euro zone. In this case, that means Germany, which already
has the fastest growth and the lowest borrowing costs in the bloc.
Andreas Rees, an economist with Unicredit, estimates exports outside
the euro zone account for 29% of German GDP, around twice as much as
in Spain, France, Portugal and Greece.
A German boom could help the euro zone in more than one way. It could
provide additional demand in Germany for goods and services produced
elsewhere in the euro zone, and reverse some of the divergence in
competitiveness between euro-zone economies that caused the crisis, as
a tightening labor market drives wages higher. But these effects take
years, and the pressures on the euro-zone periphery are immediate and
acute.
Any euro-zone economy would benefit from a drop in the euro to the
extent that it can redirect more resources to external markets. But
the willingness and ability of businesses to do that differs across
the region.
Nadio Delai, chairman of Italian research and consultancy firm
Ermeneia, say a host of smaller, less prestigious Italian shoe and
textile companies have started to export to emerging markets, riding
the coattails of more famous names.
"People are willing to spend a maximum of $100 to get made-in-Italy
products, whereas they might be not be able to buy internationally
renowned fashion brands, such as Gucci," Mr. Delai said.
-William Horobin in Paris, Tom Fairless in Frankfurt, Manuela Mesco in
Milan and Eamon Quinn in Dublin contributed to this article.
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(END) Dow Jones Newswires
July 16, 2012 16:48 ET (20:48 GMT)
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