The External Value of the Euro
This post was written by Philip Lane
Jeremy Siegel points out in this FT article that a weakening in the external value of the euro can be important the recovery of the euro area; Paul Krugman raises the objection that “… Europe as a whole, like America, remains a relatively closed economy. Its salvation must be mainly internal.”
Of course, trade with the rest of the world is a limited channel for the collective euro area. However, it is important to appreciate that trade with the “rest of the world” is especially important for the peripheral countries, so that a substantial euro depreciation can be a contributory factor to the recovery process. There is an interesting IMF paper that quantifies the role of external trade for the periphery countries – I will post a link once that paper goes online.
(The heterogeneous exposure of the periphery versus the core in relation to the external value of the euro was also much studied in relation to the very large euro depreciation against the dollar during 1999-2001. For instance, see this paper that I wrote with Patrick Honohan.)