The euro in the 'currency war'
Agnès Benassy-Quéré, Philippe Martin, 6 February 2014
The euro has appreciated sharply since July 2012. CEPR Policy Insight 70 argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated Euro, which will support aggregate economic activity and help inflation stay close to 2%.
CEPR Policy Insight No.69 is available to download free of charge here.
Topics: Macroeconomic policy
Tags: Currency wars, ECB monetary policy, euro
A looser monetary policy will favour a weaker euro and a stronger economy
Agnès Benassy-Quéré, Pierre-Olivier Gourinchas, Philippe Martin, Guillaume Plantin, 6 February 2014
The euro has appreciated sharply since July 2012. This column introduces a CEPR Policy Insight which argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated euro, which will support aggregate economic activity and help inflation stay close to 2%.
Since July 2012, the euro appreciated more than 10% against the dollar, 6% against the pound sterling, and almost 50% against the yen (IMF 2014). Does this mean that the euro a casualty of a ‘currency war’? We believe the answer is ‘no’. The strength of the euro is the result of an overly restrictive monetary policy by the ECB.
Topics: Macroeconomic policy
Tags: Currency wars, ECB monetary policy, euro
How the euro synchronised EZ cycles
Ayako Saiki, Sunghyun Henry Kim, 2 February 2014
Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.
Prior to the introduction of the euro, the topic of whether the Eurozone fulfils the conditions for an optimum currency area was highly debated (e.g. Bayoumi and Eichengreen 1992).
Topics: EU institutions, International finance, International trade
Tags: business cycles, East Asia, euro, eurozone, optimum currency area, supply chains, trade
The latest on the dollar’s international currency status
Jeffrey Frankel, 6 December 2013
Except for the period 1992-2000, the dollar’s role as an international currency has been slowly declining since 1976. Since 2010, there has been another pause in this decline – somewhat surprising, given that the financial crisis began in the US, and given Congress’ recent flirtations with default. The dollar’s resilience as the world’s reserve currency is due to a lack of good alternatives – the euro has its own problems, and the yuan only accounts for 2.2% of forex transactions.
As most people know, the general trend in the dollar’s role as an international currency has been slowly downward since 1976.
Topics: International finance
Tags: dollar, euro, foreign exchange, reserve currency, yuan
Moving closer? Changing patterns of labour mobility in Europe and the US
Mai Dao, Davide Furceri, Prakash Loungani, 1 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.
On 21 September 1992, four famous professors – Olivier Blanchard, Rudi Dornbusch, Stan Fischer, and Paul Krugman – took part in a panel discussion at MIT on the merits of the proposed European currency union.
Topics: Labour markets
Tags: currency union, euro, eurozone, labour mobility
The euro and price convergence: You wanted it … you got it!
Alberto Cavallo, Brent Neiman, Roberto Rigobon, 29 November 2013
During the recent turmoil in the Eurozone, little attention has been paid to one of the euro’s founding objectives – price convergence. This column argues that the euro has in fact been very successful in this regard. In a study of the pricing behaviour of Apple, IKEA, H&M, and Zara, the authors find that price dispersion is 30–50% lower for countries in a currency union than for those with a fixed exchange rate.
Remember some of the objectives of the creation of the euro? A single currency area within Europe would carry with it:
- Enhanced factor mobility
- Greater productivity growth
- Acceleration of financial development; and
- Improved macroeconomic policies.
Or, at least, that was the hope (Wyplosz 1997).
Topics: Exchange rates, International trade
Tags: euro, eurozone, price convergence, real exchange rates
Currency wars and the euro
Jens Nordvig, 25 November 2013
Having promised to do ‘whatever it takes’ to ensure the survival of the euro, the ECB now faces the problem of record high unemployment combined with a strong currency. There is accumulating evidence that the ECB is more willing to fight currency appreciation than the Bundesbank would have been. Capital inflows have been a key source of recent upward pressure on the euro. Should this continue, the ECB may need to intervene more aggressively in order to promote economic recovery in the Eurozone.
A new battle for the ECB to fight
Last year, the ECB entered an existential battle for the euro. By promising to do ‘whatever it takes’ to safeguard the euro, the ECB managed to calm sovereign debt markets and engineer a much-needed easing of overall credit conditions in the Eurozone.
Topics: EU institutions, Exchange rates, Monetary policy
Tags: Bundesbank, Currency wars, ECB, euro, eurozone, unemployment
Did the euro kill governance in the periphery?
Jesús Fernández-Villaverde, Luis Garicano, Tano Santos, 30 April 2013
By the end of the 1990s, under the incentive of Eurozone entry, most peripheral European countries were busy undertaking structural reforms and putting their fiscal houses in order. This column argues that the arrival of the euro, and the subsequent interest-rate convergence, loosened a tide of cheap money that reversed the incentives for further reforms. As a result, by the end of the euro’s first decade, the institutions and governance in the Eurozone periphery were in worse shape than they were at the start of the decade.
The conventional wisdom before the creation of the euro was that the monetary union would force its least productive members to undertake the structural reforms needed to modernise their economies. In the past, the peripheral European countries had used devaluations to recover from adverse business-cycle shocks, but without correcting the underlying imbalances of their economies.
Topics: EU institutions, Politics and economics
Tags: euro, governance, resource curse
Why do large movements in exchange rates have small effects on international prices?
Mary Amiti, Oleg Itskhoki, Jozef Konings, 19 February 2013
Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.
Exchange rate moves have surprisingly small effects on prices. This apparent ‘disconnect’ is one of the central puzzles in international macroeconomics. It is also a continual headache for policymakers who rely on exchange rates to accommodate the adjustment of global (current account) imbalances.
Topics: Exchange rates
Tags: competitiveness, euro, Eurozone crisis, exports, imports
Eurozone crisis: It ain’t over yet
Paolo Manasse, 17 January 2013
All G7 economies are struggling in the post-crisis climate, but US GDP has recovered to pre-crisis levels, while the Eurozone simply hasn’t. This column portrays the global crisis as a transitory shock for the US, but as a quasi-permanent shock for Europe. The policies that are needed get the Eurozone back on track do not seem to be politically feasible. As tension rises with every quarter of stagnation, prospects for the survival of the euro are not only not improving, they are actually getting worse.
Despite apparent calm on the financial markets, no illusions that the storm is ending soon should be entertained. Indeed, we may well be in the eye of the hurricane.
Topics: Europe's nations and regions, Global crisis
Tags: euro, Eurozone crisis, US