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Wednesday, July 25, 2012

Feldstein: A Rapid Fall in the Euro can Save Spain

Martin Feldstein calls for a fall in the value of the euro:

A rapid fall in the euro can save Spain, by Martin Feldstein, Commentary, FT: The possible breakup of the eurozone is now openly discussed... The declining value of the euro holds the key to the eurozone’s survival. ...
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... The weaker euro would also boost Germany’s net exports, raise German wages and prices and reduce the trade imbalance within the eurozone.
The increase in peripheral country net exports would also raise their gross domestic product and so reverse their recessions that were caused by higher taxes and cuts in government spending. That would make it politically easier to achieve the needed fiscal consolidations. 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. ...
The continuing decline of the euro reflects the market’s perception that the euro must fall or the eurozone will collapse. ... The decline of the euro can therefore occur without specific action by the European Central Bank. But a further shift by the ECB toward a looser monetary policy would speed the euro’s decline. ...
I believe now, as I did 20 years ago, that imposing a single currency on a heterogeneous group of countries is a mistake. ... But while the creation of the eurozone was an economic mistake, allowing it to dissolve now would be very costly to governments, investors and citizens. ... A new start for the euro is still well worth trying.


    Posted by on Wednesday, July 25, 2012 at 09:27 AM in Economics, International Finance | Permalink  Comments (19)


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