(From THE WALL STREET JOURNAL)
By Geoffrey Smith
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.
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. There is no
certainty that euro-zone banks will pass on the cut in borrowing
costs. ECB President Mario Draghi said 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.
"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 said.
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.
But he added that it would benefit stronger economies such as Germany
and the Netherlands more than the struggling periphery including
Greece, Portugal, Spain and Italy.
Exporting one's way back to recovery works better when 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.
Mario Boselli, chairman of the Italian Chamber of Fashion, frets that
larger emerging economies still account for only 10% of total Italian
exports. "This is not enough" to offset the weakness in developed
economies, he says.
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 the
current $1.23), to produce a robust export-led recovery.
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 bloc's
fastest growth and lowest borrowing costs. Andreas Rees, an economist
with UniCredit, estimates non-euro-zone exports account for 29% of
German GDP.
A German boom could provide more demand for goods and services
produced elsewhere in the euro zone, and reverse some of the
divergence in competitiveness between euro-zone economies. But these
effects take years, and the pressures on the euro-zone periphery are
immediate.
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(END) Dow Jones Newswires
July 16, 2012 19:40 ET (23:40 GMT)
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