Euro devaluation won’t save the zone. It will help growth, especially if the euro drops a lot more, but it will be the already thriving Germany that would benefit the most, not the beleaguered periphery.
Exchange rates matter. A devaluation makes exports more competitive and wards off import competition. But, the scale of the stimulus depends on a country’s capacity to trade and on who it trades with. On both scores, a strong Germany wins, not Spain or Greece.
Exports play a very big role in the big German economy – worth 47 per cent of GDP. In Spain, the ratio is 26 per cent, in Greece 22 per cent. Though its euro zone trading partners were weak in 2011, Germany still racked up a trade surplus of euro 158 billion, almost 10 times the total Greek exports of just euro 16 billion. Even after five years of recession, which depresses import spending, Greece’s current account deficit, a measure of trade that takes account of earnings from tourism, was a huge 9.8 per cent of GDP in 2011.
A lower euro will only help trade with non-euro economies. Here, too, the periphery has a problem. In 2011, 52 per cent of Spainish goods exports stayed within the zone and only 24 per cent went outside Europe, to the Americas and Asia. But, in January-March, 39 per cent of Germany’s exports went outside Europe. Germany’s second-largest export market is the US, its fifth largest China. A Mercedes, Audi or BMW for 10-20 per cent less? American and Chinese consumers are going to love that idea.
Of course, merchandise exports don’t tell the whole story. More British tourists may head to the euro zone Med this year as the pound has risen against the euro. But, the tourist periphery hasn’t got any cheaper for French and German tourists.
The problem is again the euro itself. It ruled out something seen as unfair: beggar-thy-neighbour devaluations. But, Greece and Spain need to get markedly cheaper against their neighbours and main trading partners, not just the rest of the world. Without that, the risk is that the big German neighbour keeps getting stronger while the weak periphery ails.