The impact of this bad news has been to weaken the value of the Euro. What will be the impact of a weaker Euro on the EU economy.
A weaker Euro would make Eurozone exports more competitive and increase the cost of importing goods into the Eurozone. It is bad news for exporters to the Eurozone (though it will not really hit UK exporters as the weakness of the Euro is being matched by weakness in Sterling)
A weaker Euro would make exports cheaper and could provide a boost to EU growth and employment. This is particularly important for Eurozone countries who rely on export led growth such as Germany.
However, the impact of a weaker Euro may be limited. Evidence suggests that demand for exports is often inelastic, a weaker currency is no guarantee of strong growth. The UK has had a weaker currency but, recovery has been weak. The impact of a weaker Euro will have a different impact within the Eurozone. I can't image a 10% devaluation in the Euro currency solving the lack of competitiveness within the Greek and Spanish economy. Much more is needed than a depreciation in the Euro. It is also important to bear in mind, the majority of trade in the Euro is within the Eurozone. For example, a depreciation in the Euro would not restore the competitiveness of Spain's exports with regard to EU partners such as France and Germany.
Inflation and A Weaker EuroThe ECB may be concerned that a weaker Euro could lead to inflation. A weak currency may cause inflation for three reason.
- Price of imports rises (cost push inflation)
- Demand for exports rises (demand pull inflation)
- Less incentives for exporters to cut costs and increase efficiency.
Given state of Eurozone economy, a weaker Euro is no bad thing at the present moment. Overall, economic growth is sluggish, and a weaker Euro may help to boost recovery. However, a weaker Euro will do nothing to redress the imbalance within the Eurozone area. The depreciation is likely to be too little for the south (Greece, Spain e.t.c) It may prove too much for Germany. Far more is needed to solve the pressing problems in many Eurozone economies.
Forecast for Euro
It is hard to see any end in sight to the problems of sovereign debt prospects. If markets become fearful of countries like Italy and Spain the Euro could come under much greater sustained pressure.