Tavares, E. (2014) “The Eurozone’s Unresolved Situation – Can market forces prevail in the Eurozone?“, ΘZeroHedge, 28 Σεπτεμβρίου.
With another round of central bank intervention coming four plus years after the start of the Eurozone debt crisis, this is a question worth considering, at a time when the Southern Eurozone members – Italy, Spain, Greece and Portugal, which collectively account for over 30% of the GDP of the early adopters of the Euro as a whole – continue to struggle.
This is a complex topic for sure, but a simple economic indicator can be used to help frame the situation.
The Real Effective Exchange Rate, or “REER”, is a weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation. A country with higher inflation will seek to devalue its currency to maintain competitiveness in relation to its trading partners (the reverse also applies of course, but these days nobody seems to want a strong currency). The REER therefore provides a gauge of that country’s competitiveness in foreign markets.
Under a fixed foreign exchange regime, policy options are much more limited. A Eurozone member can become much less competitive relative to another member with a lower inflation rate. Stated differently, its REER will increase in that situation. This dynamic provides an insight as to how the Southern European countries got into trouble in the first place, and some of the challenges associated with its resolution.
Historical Context Leading Up to the 2008 Financial Crisis
The oil shocks of the 1970s had very damaging effects in the southern contingent of the Eurozone, with inflation rates skyrocketing. Devaluations were therefore a necessity to regain competitiveness, although these also provided an inflationary feedback loop. In contrast Germany, and to a lesser degree France, more or less kept inflation under control during this turbulent period.
Figure 1: Historical CPI Inflation in Selected Eurozone Countries, 1965-2001 [Source: www.inflation.eu.]
Σχετικές αναρτήσεις:
- Mitchell, B. (2014) “Yet another solution for the Eurozone“, Bill Mitchell Blog: Modern Monetary Theory… Macroeconomic Reality, 25 Σεπτεμβρίου.
- Giavazzi, F. & Tabellini, G. (2014) “What macroeconomic policies for the Eurozone?“, VoxEU Organisation, 25 Σεπτεμβρίου.
- Koo, R. (2014) “Fixing the Eurozone“, The European Magazine, 03 Σεπτεμβρίου.