ALBERT HERTER

‘NO TEARS FOR WEAK GREENBACK,’ by Melvyn Krauss in the N.Y.Times.

In Uncategorized on November 14, 2009 at 03:25

 

By MELVYN KRAUSS

Published: November 13, 2009

Washington’s policy, devaluing the U.S. dollar to increase U.S. exports, is clearly a “beggar-my-neighbor” policy. Yet no one’s been complaining.

Why not? Because the world thinks the greenback’s fall is good for global recovery. Even in Europe, the “neighbor” most “beggared” by the greenback’s fall, the silence has been deafening.

Europe is right for staying mum. The declining dollar — or strong euro — is helping European authorities restore health to the ailing banking sector — and that’s critical for Europe’s recovery.

According to senior officials in Frankfurt, the strong euro is allowing the European Central Bank to keep interest rates at crisis lows even though the crisis is passing. E.C.B. President Jean-Claude Trichet has made it clear in recent communications he is no hurry to raise interest rates.

The reason he can get away with this relaxed posture, without raising inflationary expectations in the euro zone, is that the euro has been surging on the foreign exchanges.

Indeed, with the kind of good economic numbers Europe has been posting lately, the E.C.B., most likely, already would have started raising interest rates were it not for the strong currency.

Even some of the southern-tier countries of the euro zone, traditionally uncomfortable with a strong currency, understand the strong euro is in their immediate interests.

With banks in such fragile condition, they would rather deal with a strong currency than higher interest rates, which might put some of their more challenged banks over the brink at the present time.

European policymakers are right to give the banks a chance to recover before interest rates start going up again. They understand Mr. Trichet is not going to allow inflationary expectations to become unglued simply to save some tottering European banks from going over the edge.

That is why they have turned a blind eye to the greenback’s decline. Washington’s currency policy may be “beggar-my-neighbor” when it comes to exports, but it clearly is helping Europe restore health to its ailing banking sector — and that is what really counts if Europe is to avoid sinking back into the economic abyss.

Actually, even when it comes to its exports, Europeans appear quite relaxed about Washington’s currency policy.

Perhaps they have come to realize that foreign exchange movements are less important for their overall macro-economic health than they thought they would be.

The majority of European trade flows, after all, are coming from intra-euro zone trade, which is not affected by the dollar’s decline. It also may be true that Europe’s export industries are more competitive than many thought.

German exports, in particular, have shown themselves to be resilient in the face of the surging euro.

It is good news that Europeans are showing a sense of proportion and common sense about the export dislocations caused by the dollar’s devaluation.

In the total scheme of things, they have been small potatoes relative to the other problems they have had to confront during the crisis. Why make a big deal out of them?

When you are in good health and you break a toe, it’s a big deal. When you are fighting cancer and you break a toe, it’s minor.

The help the declining dollar is giving to Europe’s banks is far more important for European recovery than any damage it might be doing to Europe’s exports.

Melvyn Krauss is a senior fellow at the Hoover Institution, a think tank at Stanford University.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: