How much of a drag on growth is a strong U.S. dollar? How good is a weak euro?

Scott Sumner says much of what I would, namely don’t reason from a price change.  I would make a related point, but in reverse, about the now-weaker euro.  Yes, it does in the short run help the eurozone exporters and thus the eurozone economies.  But it also makes imports more expensive, all the more in the longer run as the exchange rate pass-through effect on domestic import prices holds more fully.  Even in the short run, it makes the citizenry less wealthy as measured in other currency units of account, at least assuming that people and institutions in the eurozone are holding a disproportionate share of euros, a plausible assumption.

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.


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