ECB President Mario Draghi may want to save the euro by whatever means necessary, but to save the euro he must also save the eurozone economy. When it comes to everyday currency values, a strong euro is a threat to every economy in the eurozone, from Germany to Malta.
Eight of the seventeen eurozone countries are already in recession by the classic definition of two consecutive quarters of negative GDP. Many are much worse. Greece has had a contracting economy for eight quarters, Portugal for six, Italy and Spain for seven. Five of the remaining members including France and Germany had negative GDP in the fourth quarter of 2012. The economy of the EMU as a whole has been in recession for five quarters.
The longer the recession lasts the greater the chance that voters in Greece or Portugal or Spain, to name just three countries where the unpopularity of the united currency is rising, will elect a government that rejects the euro outright or demands such changes to the existing austerity requirements that its European partners balk and the eurozone fragments.
The euro has made the potentially positive effect of a falling currency on its individual members' economies much smaller A large portion of the external trade of eurozone members is with other members of the zone and so largely immune from a currency adjustment to the terms of trade. But for the portion of trade outside the eurozone currency devaluation still offers a route for economic growth.
Greece cannot draw more tourists to its beaches by offering lower accommodation prices to German visitors because they both use the same euro. But the Acropolis is also famous outside the eurozone and for those vacationers, euro devaluation is essential. Plainly put, Germans might not come, but Russians, Americans and Chinese might.
If Mr. Draghi is to preserve the euro then he also must revive its economy. One of the necessary means for reviving the eurozone’s economy is to improve its terms of trade. To do that the euro must fall.
Chief Market Strategist