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Comment of the Day

December 20 2011

Commentary by Eoin Treacy

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on devaluing the Euro:
“In today's FT, Martin Feldstein argues in favour of a devaluation of the euro as the route to saving the currency and the economies of countries like Greece, Italy, Spain and Portugal. He looks at the price of products but not at their quality in competitive terms. The German success in international markets is mainly due to their high quality. That is why German exports rose consistently when the old D-Mark went up in value. Even with a devaluation of the euro, the southern countries might not benefit because they do not produce quality goods and services. Ireland is different because it has something of quality to offer.”

Eoin Treacy's view Thank you for the attached article and your additional comments. The combination of lower wage growth and increased productivity made Germany's goods more competitive on the global stage. Italy also has a vibrant manufacturing sector but as this chart of the legacy Lira / Deutsche Mark rate suggests it relied heavily on currency devaluation for competitiveness gains prior to the adoption of the Euro. The same is largely true of other currently troubled Eurozone peripheral countries.

Devaluation of the Euro would offer a short-term reprieve for the manufacturing and export oriented industries of Italy, Spain, France etc. However, as you mention, that would do nothing to improve their competiveness versus Germany. It is pointless suggesting that the Germans should consume more when they have just about everything they need other than energy. The credit fuelled consumerism of the English speaking world is largely absent in Germany. Cities, states and the sovereign on the other hand have large debt burdens as well as pension and social security obligations.

The only ways peripheral countries can improve their competitiveness is through a long process of austerity and productivity gains, a reduction of their debt servicing costs and/or a currency devaluation relative to Germany. The first of these is already in the process of being implemented. It remains to be seen which of the other alternatives will be adopted.

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