Euro too strong: why is it not good news?

Euro too strong: why is it not good news?
0 comments, 11/01/2014, by , in Debt, Economy

When it comes to the euro we are often faced with paradoxes. During this period, the euro zone is struggling to see a recovery in the economy and the GDP growth, yet the single currency is stronger than ever against the dollar, with appreciation of around 10% over the past two years.

Euro-USD

Euro-USD

The causes are varied. One is certainly constituted by the insecurity of the future of the U.S. economy, undermined by disagreements over the management of public debt. Even the Japanese Abenomics leads to an appreciation of the euro. The fact that the euro is getting stronger, cutting the legs or export of goods by losing competitiveness to businesses. Of course, the challenge facing the European economy is also improving productivity, by encouraging innovation and in being able to conquer new markets, those of emerging countries.

However, the issue of the appreciation of the euro does not pertain only to the deleterious effects on exports, but also those relating to gross domestic product and inflation. We are in fact witnessing a surplus in the trade balance of countries like Italy and Spain, which is caused by a too high amount of private savings, combined with a lack of consumer demand and weak investment. The lenders tend not to lend money to fix budgets, but to buy government bonds. On the one hand this means that the debt is increasingly in European hands and therefore there is less subject to volatility caused by foreign investors, but also means to keep stall the economy.

In addition, the strength of the euro leads to a downward trend in prices, we are in a period of disinflation, which could soon turn into deflation, or a drop in prices across the board, which will have a further negative effect on the amount of consumption no one wants to spend today if he/she knows that tomorrow will pay less – and this further depresses the economic growth and makes it increasingly difficult for the debt sustainability, by pushing the economy into stagnation.

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