The Strong Euro: Challenges for the European Central Bank and Implications for the Global Economy

Belke, Ansgar; Volz, Ulrich

Abstract

The exchange rate can have important effects on inflation, export performance and growth. Against the backdrop of a strong euro and calls for the European Central Bank (ECB) to lower the common currency’s external value, this article discusses the challenges for the ECB and the Eurozone stemming from a strong euro and weights the arguments for and against currency intervention by the ECB to weaken the euro. We argue that a devaluation strategy is no panacea to the Eurozone's problems. Macroeconomic imbalances within the Eurozone need to be resolved primarily by structural adjustments. However, a modest euro devaluation and higher inflation in the core countries will facilitate adjustments in the periphery countries. Given that a resolution of the European debt problems and a sustained recovery of the Eurozone is also in the interest of the rest of the world, a modest euro devaluation should not trigger a competitive devaluation spiral.

Citation

Belke, A., & Volz, U. (2015). The Strong Euro: Challenges for the European Central Bank and Implications for the Global Economy. AEI Insights : An International Journal of Asia-Europe Relations (Kuala Lumpur), 1(1), 53-68

• Journal Article Type: Article
• Publication Date: Jan 1, 2015
• Deposit Date: Mar 31, 2015
• Print ISSN: 2289-800X
• Peer Reviewed: Not Peer Reviewed
• Volume: 1
• Issue: 1
• Pages: 53-68
• Publisher URL: https://aei.um.edu.my/the-strong-euro-challenges-for-the-european-central-bank-and-implications-for-the-global-economy