Harvard’s Feldstein: Euro’s Rapid Plunge Could Save Eurozone

Wednesday, 25 Jul 2012 11:29 AM

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A rapid decrease in the value of the euro might actually save the currency, says Martin Feldstein, Harvard economist and former Reagan adviser.

“A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone,” Feldstein wrote in the Financial Times.

A weaker euro would also increase Germany’s net exports, wages and prices, while reducing the trade imbalance within the euro area.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

The increase net exports for the peripheral countries would also increase their gross domestic products, thereby reversing their recessions that were caused by higher taxes and cuts in government spending, Feldstein explained.

“That would make it politically easier to achieve the needed fiscal consolidations,” he said. “And shifting from recession to growth would raise business incomes and employment, reducing the volume of bad loans and mortgage defaults now hurting the banks.”

An improvement in the eurozone’s net exports would not affect the U.S. economy much, as the U.S. trade with eurozone countries equates to less than 5 percent of U.S. GDP, Feldstein noted, adding that it would have a negative effect on American exports.

“A rescued eurozone would still face the problem inherent in the single currency: an inappropriate monetary policy in different countries at different times,” he stated. “But the other problems of the euro may not continue.

“The bond markets will prevent the excess borrowing by governments and private individuals that occurred in the past decade,” Feldstein wrote. “And the peripheral countries are beginning to take the necessary reform steps that could reduce the differences in productivity and unit labor costs that have contributed to widening trade deficits.

“A new start for the euro is still well worth trying,” he said.

The euro fell to a two-year low against the dollar earlier this week and was near a 12-year trough against the yen, Reuters reported, after a sell-off in global stocks amid mounting fears that debt-ridden Spain will need a bailout.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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