Weak euro, booming euro zone economy? Not quite
Mar 20, 2015
There's little doubt a sharp fall in the single currency could lift the euro zone growth outlook, but the impact is far from clear cut, analysts say.
The euro has shed almost 25 percent of its value against the U.S. dollar in the past year to trade around $1.06. On a trade-weighted basis, the decline is smaller, at around 13 percent, but is still seen viewed by economists as a sizeable fall.
This drop – helped by massive monetary stimulus from the European Central Bank (ECB) and a fall in oil prices – has prompted some forecasters to raise their outlook for euro zone growth, as well as put the zing back in euro zone stocks.
The pan-European Euro Stoxx 600 Index has surged almost 16 percent this year compared with a 1 percent gain in the S&P 500 - a broad measure of U.S. stocks.
Plus, look at investor sentiment in Germany, Europe's biggest economy. It rose to its highest level in just over a year in March, closely-watched figures from the ZEW institute showed Tuesday.
"Over the last two years, the ZEW index has returned as an interesting and more reliable indicator for future economic growth," ING-DiBa Chief Economist Carsten Brzeski said in a research note.
"While between 2010 and 2012, the fundamental and structural strength of the German economy prevailed, it is now cyclical factors like dropping oil prices, a weakening euro and the ECB QE [quantitative easing] which are the most important growth drivers," he added.
The ECB estimates that a 10 percent depreciation in the value of the euro gives annual gross domestic product (GDP) in the euro zone a roughly 0.4 percent boost and raises inflation by 0.6 percent.
That's good news for a region that has suffered lackluster growth for years and been at risk of deflation in recent months.
UBS last week lifted its 2015 euro zone GDP growth forecasts to 1.6 percent from 1.2 percent.
Meanwhile, data on Tuesday showed consumer prices in the euro area rose 0.6 percent on the month and fell 0.3 percent on the year in February—a decline less sharp than the 0.6 percent year-on-year fall seen in January.
Still, economists say there are some important caveats to consider when assessing the soft euro's impact.
For one, the benefits of the weak currency are unlikely to be felt throughout the 19-member euro zone, including uncompetitive, smaller countries such as Greece that need economic growth to help tackle their debt mountains.
"One thing I would say about this move in the euro is that it really favors those in Europe that really need it the least – Germany and France," Stephen Roach, a senior fellow at Yale University and a prominent economist, told CNBC last week. "They've accounted for over 45 percent of all exports over the past five years. The so called PIGS – Portugal, Ireland, Greece and Spain - they are less than half of that."
Export kick
Jonathan Loynes, chief European economist at Capital Economics, added that just because the euro was falling did not mean exports from the euro zone would rise. He points out that a fall in the euro in 2009 and 2012 did not prevent exports from slowing or falling, because demand globally was generally weak.
"Overseas conditions would appear generally stronger than in those periods, but it is noticeable that surveys of export orders have yet to show much of an improvement from the depressed levels of last summer," Loynes said in a note.
He concluded that the euro fall was welcome and would alter growth and inflation forecasts once the impact was clearer.
"But it would be wrong to think that those effects are mechanical or to believe that a weaker currency alone can solve all of the euro-zone's problems," Loynes said.