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| English: €2 commemorative coin Euro Zone 2007 50th Anniversary of the Signature of the Treaty of Rome Français : Pièce commémorative de 2 euros de la Zone Euro en 2007 pour le 50e anniversaire de la signature du Traité de Rome (Photo credit: Wikipedia) |
The Euro Crisis started two years ago and thanks to Ms. Merkel's single-minded obsessive focus on austerity and debt reduction, we haven't moved one step closer to resolution of the crisis. The immediate result of this pig-headed approach is that default becomes the only alternative to devalution. Available fixes for the Euro mess are by-passed and the easiest one (devaluation) is simply ignored.
Why?
Because our narrow-minded, chauvinistic politicians can't think in Europe-wide terms. You have to consider the Euro-zone as a whole. If five out of the 17 member countries are in deep trouble (Greece, Ireland, Portugal, Spain and lately Italy) and a major 6th one is about to sink in recession (France) not to mention other smaller ones that are suffering too (Belgium, the Netherlands), why, it's obvious: you should stop pretending the Euro-zone currency is in perfect health!
It's not.
Its value on currency markets quite clearly does NOT reflect the real state of the Euro-zone economies. It makes no sense at all that the Euro should be higher than the dollar: the US is slowly climbing out of recession while Europe is falling ever deeper into it. The Euro could perhaps be a little above the dollar but not some 25% above it! That's way too much.
The economic solution to such a situation is a classic: devalue! We all know the reasoning: devaluing the currency makes exports cheaper giving them a boost. Et voilà! The economic machine whirrs up again. Exactly what the suffering Southern Europeans need, but mind you, it's also going to help the Germans. Their exports will soar and everybody will be happy again in Europe, and, incidentally, the rest of the world too. Because a sick Europe is making the whole world sick, including China, India, Brazil - the emerging economies that had pulled us out of the 2008 slump and are now in pain as they find they aren't exporting to Europe anywhere near the levels of two years ago. Yes, two years ago when the Euro crisis started...
Comments
If the progressives (Republican and Democrat) lose control of the U.S. government this fall, there will be a short term reaction from business opening their coffers and making limited investments in new products, services, plant & office facilities, etc. This will continue only if the new government removes the constraints imposed on business in the past couple of decades.
However, if the Euro is devalued, regardless of who wins the elections in the U.S., the American economy will take a hit and any recovery, real or imagined, will probably falter.
If the American economy falters any further, which it will if the progressives remain in control or the Euro is devalued, everybody will suffer.
Then again, I could be wrong
Devaluation is always a touchy subject, and so far the Euro has lost value, but clearly not enough to make a difference and boost exports. The US authorities have generally played a clever game with the dollar, maintainting it at exactly the right level where it sustains exports without adding to the recession at home. And yes, Jack, your analysis is probably spot on, but you have to consider that a devaluation - if correctly carried out - is just one move in a much longer timeframe: the boost it might give to exports is necessarily compensated by a subsequent rise in inflation at home as imports become more expensive. Then everything comes back in balance and one hopes that the boost to exports willhave been sufficient to help Europe climb out of its hole.
On the other hand, if that doesn't work and the recession in the Eurozone is not cured but goes on, well then, the American economy will surely suffer!
Jack is right - the United States isn't slowly (or otherwise) climbing out. We just happen to be the greatest showmen on the planet and we can give the appearance of soaring right up to the moment we smash into the ground or start the next war.