While some financial commentators are worried about currency wars, Harvard economist Martin Feldstein apparently isn't one of them.
The chairman of President Ronald Reagan's Council of Economic Advisers says Europe should work to lower its currency's value.
"There are few if any panaceas in economics,"
he writes on Project Syndicate. "But a sharp decline in the euro’s exchange rate — say, by 15 percent — would remedy many of the eurozone’s current economic problems."
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The euro has climbed 5 percent against the dollar over the past two years.
A euro devaluation would lift eurozone GDP growth by boosting exports and nudging Europeans to replace imports with domestically-produced goods and services, Feldstein says.
Eurozone GDP expanded only 0.3 percent in the fourth quarter, and Feldstein says it's likely that growth will barely surpass 1 percent this year. Meanwhile, eurozone unemployment stood at a lofty 11.8 percent in March.
At the same time, annual inflation totaled only 0.7 percent in April, and the 18-nation group is at risk of deflation from even a minor shock, Feldstein says.
European Central Bank (ECB) President Mario Draghi has voiced fears about the euro's strength of recent years.
"But neither Draghi’s recent statements nor the prospect of an American-style program of large-scale asset purchases has caused the euro to weaken or the inflation rate to move back toward the target level of 2 percent," Feldstein writes.
So how to depress the euro? Quantitative easing isn't the answer, Feldstein says. In the United States, that approach by the Federal Reserve hasn't had much impact on the dollar or inflation.
"The real trade-weighted value of the dollar is now at the same level that it was in 2007, before the onset of the Great Recession," he writes.
"The dollar’s value then remained relatively stable during more than three years of quantitative easing (QE) and actually rose during 2013, when the Fed’s asset purchases reached a high of more than $1 trillion."
As for inflation, consumer prices rose 1.6 percent in 2010, when quantitative easing began, and actually decelerated to a 1.5-percent increase in 2013, when QE peaked, according to Feldstein.
Many experts agree with Feldstein that a QE campaign by the ECB wouldn't hurt the euro much, even if it gets as aggressive as Japan,
Reuters reports.
"The ECB has always said that the situation in the eurozone is different from Japan," Kenneth Dickson, investment director at Standard Life Investments, told the news service. "So while QE will push the euro lower, we do not expect the 10-15 percent decline we saw in the yen."
So what should Europe's central bankers do?
"If the ECB wants to reduce the value of the euro and increase the eurozone’s near-term inflation rate, the only reliable way to do so may be by direct intervention in the currency market — that is, selling euros and buying a basket of other currencies," Feldstein writes.
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