- Created on Tuesday, 29 May 2012 12:35
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Steep declines in the euro symbolise the woes of Europe's monetary union but could have a silver lining: the boost to exporters may offer some much-needed support to economic growth across the 17-country region.
Last year, even as the euro crisis escalated, the currency's value remained remarkably steady. In recent weeks, however, financial market sentiment towards the euro has turned decisively for the worse.
On a trade-weighted basis, the euro has fallen by more than 6 per cent over the past year to the lowest since 2003. Against the dollar, the euro has dropped to a near two-year low of about $1.25.
On a rough rule-of-thumb used by economists, a 10 per cent fall in the euro's trade-weighted value should boost economic growth by about 0.5 percentage points or more.
A fillip would be timely. Eurozone purchasing managers' indices last week showed private sector activity contracting this month at the fastest rate for almost three years, as worries about the eurozone's stability compounded the impact of fiscal austerity across much of the continent.
May saw one the biggest drops in German business confidence since the collapse of Lehman Brothers in September 2008, according to the Munich-based Ifo institute.
Ifo's survey showed the positive effects of a weaker euro were having an effect. Despite the plunge in overall confidence, German exporters became significantly more confident about export prospects this month.
Analysts warned, however, that help would not be targeted at those parts of the eurozone where it was most needed -- and would not mark a change in the region's fortunes.
The main beneficiaries of the weak euro will be countries that export proportionately more to countries beyond the eurozone. These include Ireland but also Belgium, the Netherlands and Germany, which remains among the eurozone's best performers.
Even then, the benefits will not offset the impact of weak demand from eurozone neighbours.
"For the German economy, stronger growth in Italy, France and Spain would have a bigger positive impact than we will get from the weaker euro," said Steffen Elstner, economist at the Ifo institute.
"Exports from southern Europe are more price sensitive than German exports, which will increase the positive impact of a weaker euro. But again, the more important factor will be the strength of demand in the rest of the eurozone."
Andreas Rees, economist at Unicredit in Munich added: "The weaker euro, combined with stronger demand from the rest of the world, may be enough to offset the negative impact in Germany of fiscal austerity in the rest of the eurozone but elsewhere it is not going to compensate for all the downward pressures."
Crisis-hit Greece, but also Portugal and Spain, may benefit little as their exports beyond the eurozone are relatively unimportant.
The euro's weakness could complicate the task of the European Central Bank. With eurozone economic activity fragile at best, economists are speculating that it could cut interest rates in coming months.
But Peter Vanden Houte at ING in Brussels warned that the varying impact across the region of the weaker euro "will even increase divergences within the monetary union."
If the currency's fall fuelled inflationary pressures in the eurozone's largest economy, "it is going to awaken complaints from Germany that the ECB's policies are too loose", he added.