The External Value of the Euro

Brendan Walsh highlights the importance of the external value of the euro for competitiveness.  In fact, recent IMF work (not yet online) shows it is very important for all peripheral countries (even though cross-border finance is primarily obtained within the euro area, cross-border trade is much more extensive).

Martin Feldstein has a new FT op-ed also on the importance of a weaker euro here.

The role of the depreciation of the euro against the dollar during 1999-2001 in creating divergences within the euro area is analysed in this paper I co-authored with Patrick Honohan.

13 replies on “The External Value of the Euro”


I saw this and I thought of you:

“Much of the very high apparent productivity growth in Irish manufacturing over the past several decades is an artifact of transfer pricing, and Ireland is already close to the EMU-average of per capita GNP
(Honohan and Walsh 2002).”

@DOCM I saw this and I thought of your trolley:

“Interest rates and house prices
Given the very high interest rates previously experienced, whether measured in nominal, exchange-rate corrected, or real terms (Figure 3.4), it was always clear that EMU accession would lead to a sizable step reduction in interest rates and a reduction in their volatility. 9 In the event, since EMU began, Irish real interest rates have been the lowest in the union at an average of minus 1 percent (reflecting the higher inflation
rate). This represents a sizable change in intertemporal prices facing resident households (as well as locally exposed firms on average), and this may be expected to alter local asset prices, such as that of housing. The Irish property boom since the late 1990s has pushed real house prices to well over 250 percent of the levels of the early 1970s and
mid-1980s. Demographic pressures and real income growth have obviously
contributed, and there may have been a non-fundamental (bubble) component but there will also have been an important contribution of capitalization effects of the interest rate change (or the impact of interest rate decline on what market participants call “affordability”). 10 11 12 Just how big this capitalization effect is depends very sensitively on how large is the fall in the market’s expectation of the likely average of real interest rates in coming years – at the extreme, a fall from 7 per cent real to close to zero real (close to the actual shift between pre-1993 and post 1999) could warrant a price doubling.”

@ grumpy

“DOCM I saw this and I thought of your trolley:”

Do you mean ” I thought you were off your trolley,?”

@ grumpy

About 49,000 direct Irish workers accounted for 69% of total Irish exports (goods and services) in 2011 – – 2.33% of the total workforce including the unemployed.

@ All
A weak euro can help and while Spain’s export performance has been better than Italy’s in recent years, it was the reverse during the bubble.
Spain is more dependent on European trade than Italy and the latter is better positioned in Asia than Spain.

The big recent development is that Germany’s trade with the rest of the EMU is almost in balance.

In 2011, more than 510,000 German enterprises imported goods from other EU member states, while some 250,000 were exporters.

Spain had about 90,000 exporters in 2011.

Armchair experts often give the impression that a change in price can easily trigger new business. In non-commodity areas, the OECD says that the vast majority of Canadian exporters only have one single partner country (the United States). On average, EU exporters are also dependent on a single trading country when they sell outside the EU.

The top 1,000 exporters represent 70% of total US exports and, on average, 72% of EU external trade. Intra-EU exports are less concentrated though, with the top 1000 exporters accounting for, on average, 64% of the sales between EU member countries.

@Martin Feldstein

Have you applied for the medical card yet? And 100% [N=?] of those European ‘experts’ agree with you! Little wonder the EZ is in the state it is in … fond regards to Lorenzo …

@ Brian Woods Snr

The late American historian Daniel Boorstin, who also was head of the Library of Congress, wrote interesting books on America including ‘The Americans: The Democratic Experience,’ in which he chronicles how the Irish took control of the big urban areas in the 19th century through our mastery of machine politics.

Boorstin wrote that the Irish were the largest single group to arrive in the half-century before the Civil War and many found that they had changed their locale but not their fortunes. Irish paupers became American paupers. But what was remarkable was that so many of these victims of centuries of oppression actually attained power and respectability in a strange country. To those who were lucky and energetic and ambitious, America did offer a new life, first to a few leaders, then to more and more of the anonymous thousands. The historian said when Joyce’s Stephen Dedalus said, “History is a nightmare from which I am trying to awake,” he summed up Irish history. And the United States was to be the place of awakening.

Getting to the point here, Boorstin wrote in an essay, ‘The Amateur Spirit and its Enemies,’ published in his book ‘Hidden History’: “In the United States today there is hardly an institution or a daily activity where we are not ruled by the bureaucratic frame of mind — caution, concern for regularity of procedures, avoidance of the need for decision” — all of which, Boorstin suggested, was best summed up “on a sign over the desk of a French civil servant: ‘Never do anything for the first time’.”


The piece on Robert Mundell is interesting.

Reading the three minutes to midnight warnings from the calamity howlers every so often, I have wondered apart from Germany exiting, how would a currency accounting for 20% plus of US$10tn of global reserves, suddenly collapse?

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