The weaker euro – who benefits?
20 May 2010
With the euro down almost 20% against the dollar since the Greek crisis blew up at the end of last year, European politicians seemingly doing their utmost to undermine the currency, and reports that fund managers are deserting the currency, a weaker euro looks here to stay. For many exporters based in the euro area, that will provide a welcome shot in the arm. But which economies will benefit the most from a weaker euro?
Extra-euro area exports
Source: ECB, Eurostat and Daiwa Capital Markets Europe Ltd.
The chart above provides a rough guide to the relative importance of exports to the non-euro world for each participating member state. A few things stand out:
• Two small island economies – Ireland and Malta – stand to benefit greatly from a weaker euro (although, given the importance of the UK in their trade and the recent weakness of sterling, the chart probably exaggerates the boost from recent market events.)
• A middle ‘core’ group, which includes Germany, the Netherlands and Belgium, should also get a noticeable boost to economic growth from exports.
• But those countries at the eye of the fiscal storm in the euro area – Greece, Portugal and Spain - are the three countries that will benefit the least from a weaker currency. Italy, which has suffered from anaemic growth over recent years, and France, which has also repeatedly run current account deficits over each of the past five years, can also expect to receive little benefit from a softer euro.
Of course, a weak euro is not unambiguously good news for the euro area economy. For example, the resulting increase in import prices will hit real household incomes, which are already under pressure from pay cuts in public sectors, further dampening consumption growth. And it will do nothing to resolve the large existing large imbalances within the euro area itself. Indeed, overall, we think that events in the forex market will simply exacerbate existing trends. The Germanic core will get a further boost to their ruthlessly efficient export sectors. But the crisis-hit and woefully uncompetitive Club Med countries, which were already faced with the poorest growth prospects, will get little or no benefit to demand.
Grant Lewis, Head of Economic Research
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