Falling euro may help European economic growth

The surging dollar and plunging euro are making problems for U.S. exporters and bargains for American tourists and shoppers. Some top economists say the currency mismatch could, eventually, help revive the sagging European economy.

The euro has fallen sharply, hitting its lowest level in 12 years compared to the dollar.

Carnegie Endowment international economist Uri Dadush said Europe’s faltering economy is hurting its currency.

“A big gap has opened between the performance of the U.S. economy in particular and the Europeans,” said Dadush.

European officials are working to revive economic growth by pushing down long-term interest rates through a complex program called “quantitative easing.”

Lower interest rates make it easier for businesses to borrow the money needed to buy new buildings and equipment to expand operations and hire more people.

Low interest rates also mean investors take their money elsewhere, however, in search of better returns. That reduces demand for euros and causes the value of the currency to fall.

By contrast, the United States cut interest rates some time ago, has resumed growing, and is getting ready to raise interest rates. That is attracting more investment, boosting demand for dollars, and raising the value of the greenback [the dollar].

PNC Bank economist Gus Faucher, speaking via Skype, said the expensive dollar is creating some “headwinds” and slowing down  the U.S. economy.

“The stronger dollar against the euro that makes imports to the United States less expensive, makes exports from the U.S. abroad, to Europe and other places, more expensive, so that’s a drag on growth,” said Faucher.

Faucher says the strengthening U.S. economy will overcome these headwinds and continue growing, cutting unemployment and boosting wages this year.

In the meantime, the weak euro is making European exports a relative bargain on world markets, boosting demand for them and helping the companies and countries that export products.

“It is definitely going to help, the Europeans in particular,” said economist Dadush.

The current sharp differences between the U.S. dollar and the euro may ease over time. When Americans buy a lot of foreign goods, but sell fewer exports, the resulting trade deficit subtracts from economic growth and will tend to reduce the value of the dollar. The cheap euro will boost European exports, and tend to increase economic growth, and strengthen that currency.

Source: VOANews.com

(Photo: Pedro Moura Pinheiro/flickr.com)