In the October 2014 economic update video for eZonomics, senior economist Martin van Vliet explains the size of the fall and how a weaker currency may actually stimulate growth for Europe.
Cheaper exports, more expensive holidays
Van Vliet tells how the ECB launched a series of stimulus measures for the economy that had the side effect of weakening the common currency – the euro.
He says a weaker currency has many implications but two are especially important.
“First, Eurozone exports become cheaper for people outside the region, which will boost demand,” says van Vliet.
“The flipside, however, is that Eurozone imports become more expensive. Energy imports, for example. Tourism also becomes more costly for Europeans travelling outside Europe.”
Depreciation and growth
He says that between March and early October, the euro fell by almost 6%, on average, against the currencies of the Eurozone’s trading partners.
The precise impact is not known but a “rule of thumb” is that “a sustained 10% depreciation over time will boost Eurozone economic activity by around one percentage point”. Under that logic, the recent depreciation is consistent with an upward effect on economic growth of about 0.5 percent.
“Not enough to kick start strong, sustained, job-creating, economic growth in the Eurozone,” says van Vliet. “But the euro could well depreciate further.”