This blog has been created to provide an area for economics students to read about how economics impacts daily life. It is especially useful for students to understand the application of macroeconomics as communicated through the media and governmental websites.

This online resource has been set up for educational purposes.All rights are reserved by the various websites.

For further clarification, please email

Business Times - 19 Oct 2009

Weak $ poses problems for Europe's recovery

(BRUSSELS) The spluttering economic recovery in Europe is endangered by a dive in the value of the dollar which experts warn Washington covets in order to lower debts to China and boost exports.

As finance ministers from the 16 countries that use the euro gather in Luxembourg today to tackle rifts on climate financing, exit strategies and banking supervision, the exchange rate is a new fear they could do without.

The euro touched a 14-month high of 1.4968 dollars last Thursday, crowning a rise of around 18 per cent against the dollar since March.

'If the euro's direction were to continue to move along the lines of recent weeks, there is a risk . . . that it could slow economic recovery in Europe,' Jean-Claude Juncker, who heads the Eurogroup, said last Friday.

While Luxembourg Prime Minister Juncker said he was 'not too worried' by the euro's present level, still below the 1.60 dollars it hit in July 2008, his remarks came on top of European Central Bank president Jean-Claude Trichet's warning that excess exchange-rate volatility is an 'enemy' of stability.

There is concern in Europe that Washington is allowing a weaker dollar as a short-term boost to its own exports and a long-term reduction in the value of government and private debts, much of which is held in China.

Simultaneously, the United States is attacking China for a 'lack of flexibility' in its yuan currency, which has depreciated 6.9 per cent against the dollar since February, and for rapidly building up its foreign reserves.

'It is the Chinese and not the Europeans that are most on the minds of US policymakers,' Michael Ben-Gad of London's City University told AFP. 'By lowering the value of the dollar, the Americans lower the value of their debt.

'Those holding US dollar assets, particularly the Chinese, will be left with cheaper dollars.' Mr Ben-Gad warned European policymakers may be left with little alternative but to try and emulate that stance. 'Britain is clearly committed to doing something similar.

'The danger, of course, is a bout of international inflation if everybody tries this,' he added.

Veronique Riches-Flores, an economist with French bank Societe Generale, said the effects of the weak dollar on Europe are moderated by present weak growth and feeble exports but could pose a 'major problem' in the medium-term.

She warned that Europe's position in Asian markets may also suffer, citing the unofficial peg between the dollar and the yuan meaning that 'each time the euro rises against the dollar, it goes up proportionately against the yuan'. The European Commission reckons that appreciation in euro value against the dollar of 10 per cent in real terms would see exports fall by around 2.5 per cent within two years.

At a G20 summit in Pittsburgh last month, world leaders unveiled a new vision for economic governance, with bold plans to fix global imbalances and give more clout to emerging giants such as China and India.

Brussels-based forex specialist Peter Wuyts, of KBC bank, said leading EU politicians are forgetting their commitment to these goals when they complain about the present currency rate. 'If you want to rebalance the global economy, a weaker dollar is fundamental to the debate,' he said\. \-- AFP