The Euro Is Still Far Too Strong

by: Scott Sumner

The title of this post does not refer to the exchange rate, the importance of which is overrated.

Tyler Cowen has a new post on the euro. Here's his conclusion:

All in all, the weaker euro is likely to prove a net benefit to the eurozone, all the more so if monetary policy can drum up some expansionary domestic benefits above and beyond the exchange rate effect. Still, if you deliberately engineer a depreciation of your currency out of weakness and desperation, the long-run benefits usually don't match up to that immediate feeling of short-run juice.

This is correct. There are many examples of Latin American or Mediterranean countries devaluing their currency, and merely ending up with higher inflation in the long run. But it's also important to point out that the euro is still far too strong. Unfortunately, there is no single measure of the strength of a currency, but surely it is more meaningful to talk about its ability to purchase a basket of all goods and services, as compared to its ability to purchase a pound of zinc, a share of Apple stock, a US dollar, an Australian dollar, or a Zimbabwean dollar. I'd argue that a still better measure would be the fraction of a year's eurozone NGDP that can be bought with a single euro.

In any case, whether you use the price level or NGDP as your metric, the euro is far too strong. So while there are many examples throughout history of countries debasing their currency, the eurozone is not currently one of those examples.

PS. If in fact the ECB has engineered a weaker euro in the forex markets, then ipso facto it has engineered "some expansionary domestic benefits above and beyond the exchange rate effect" relative to a tighter monetary policy stance. When using monetary policy, you can't have one without the other.