The Decline of Euro can Actually Boost European Economy

According to many economists,  16-country currency is heading for a significant decline because of Europe’s government debt crisis. Some even predict that euro is going to sink to such a level, ie. €1 equals $1, 18 percent slide from the current value. This is going to lower European’s purchasing power for imports. But if it happens gradually, then the drop in the euro’s exchange rate could help exports and further boost Europe’s troubled economy.

Exports is the main factor to keep Europe out of recession. In the fourth quarter of 2009, exports from the eurozone went up 1.9 percent over the previous quarter to a total of €838 billion — or 36 percent of eurozone economic output.

With a lower euro, Parisian hotel owners would be able to sell more Left Bank hotel rooms to tourists from North America, while Italy will also sell more shoes and textiles. And Spain just might be able to hand over some of that vacant seaside property left from real estate bubble. And since China and other Asian countries relate their currency with the dollar, the trade with Asia will improve as the euro weakens further.

European governments slowed the the downturn of Euro by agreeing on a €110 billion bailout for Greece and a safeguard of up to $1 trillion for other indebted governments. But there is a strong doubt that remains about countries’ ability to pay down heavy debts, or about whether all 16 members will be in the euro eventually.

“The standard argument is that it is not the actual level of the exchange rate, but it more the speed that the exchange rate moves that gets policy makers nervous,” says Unicredit’s chief economist Marco Annunziata.

A lower euro could help offset the negative effects of spending cuts and tax increases that is already being considered by countries such as Greece, Portugal, Spain and Italy. These austerity moves are being taken to ensure against the nightmare scenario where investors refuse to buy new issues of government debt in the weaker euro nations like Greece, Portugal, Spain and Italy and that triggers further decline of Euros.

Economists cautioned what the euro needs more than spending cuts or bailouts are structural reforms to get investors on their side. That means stricter rules on controlling deficits so that it doesn’t recur again, and reducing the regulations on hiring and firing that discourage job creation.

“It is very difficult to stop the slide until they can convince people that they can turn the economies on Europe’s periphery to growth,” Barcelona-based independent economist Edward Hugh said. “Investors are increasingly taking the view that the more difficult it is to return these economies to growth, the more difficult it is to hold this together in its present form. No one wants to hold currency in economies that may not be stable.”

The weaker euro is very good news for Italian firms as they trade outside the eurozone. On the other end of the economic scale, powerhouse Germany will get less of an export boost, because its products have better quality and not very susceptible to currency fluctuations.