Tags: Feldstein | euro | weaken | debt

Harvard’s Feldstein: Weaker Euro Would Soften Debt Crisis

Wednesday, 31 Oct 2012 11:04 AM

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European policymakers should take steps to weaken the euro, allowing troubled countries to export their way to health, said Harvard economist Martin Feldstein.

Countries such as Italy, Spain and France could weaken their currencies to increase exports, which would eliminate current-account deficits — if they weren’t part of the eurozone.

Fiscal deficits would narrow as well, and banking sectors would improve.

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The problem is, such a scenario can’t play out, though a weaker euro could allow the currency zone as whole to be more competitive.

“[O]f course, Italy, Spain and France are part of the eurozone and therefore cannot devalue. That is why I believe that these countries — and the eurozone more generally — would benefit from euro depreciation. Although a weaker euro would not increase their competitiveness relative to Germany and other eurozone countries, it would improve their competitiveness relative to all non-eurozone countries,” Feldstein wrote in a Project Syndicate column.

“If the euro falls by 20-25 percent, bringing it close to parity with the dollar and weakening it to a similar extent against other currencies, the current-account deficits in Italy, Spain and France would shrink and their economies would strengthen,” added Feldstein, who chaired President Ronald Reagan’s Council of Economic Advisers.

“German exports would also benefit from a weaker euro, boosting overall economic demand in Germany.”

The euro is currently trading around 1.30 per U.S. dollar.

The European Central Bank (ECB), meanwhile, has rolled out a plan to buy sovereign debt from troubled European countries, which would lower borrowing costs.

To qualify, countries must request financial aid from the eurozone’s emergency fund, the European Stability Mechanism, which would apply austerity measures as a condition for bailout money.

So far, nobody has sought to tap the program, though market talk insists Spain will do so very soon, and expectations of which have sent the euro firming against the greenback in recent weeks.

While such a scheme is designed to prevent messy defaults and exits from the eurozone, it shouldn’t aim to strengthen the euro anymore than it has.

“It is ironic that the ECB’s offer to buy Italian and Spanish debt has exacerbated external imbalances by raising the value of the euro. Perhaps that is just a temporary effect and the euro will decline when global financial markets recognize that a weaker exchange rate is needed to reduce current-account deficits in the eurozone’s three major Latin countries,” Feldstein wrote.

“If not, the ECB’s next challenge will be to find a way to talk the euro down.”

Some European monetary policymakers have said the ECB should act with caution if and when it does roll out its bond-buying program.

Once a country requests a bailout and qualifies for the program, the ECB will buy an unlimited amount of the country’s sovereign debt in the open market.

The bank would buy bonds carrying maturity of three years or less.

Go easy, said ECB Executive Board member Benoit Coeure.

Being too aggressive could push the load on European taxpayers down the road.

“We have to care about the risk portfolio of our balance sheet,” Coeure said in a seminar held in Osaka, Japan, according to Reuters.

“We are at a time when the euro area capital markets are very fragmented because of the crisis. This should not last long.”

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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