Don't worry about the euro!

What is your spontaneous reaction when you hear that the euro has fallen yet again? While you are thinking, let me tell you mine. It is ”shit!” (or worse).

That’s not a very sophisticated reaction, I admit. Nor it is an intelligent one, particularly from someone who studied economics for six years.

But let me try to explain myself. My first thought, you see, is that it will be more expensive for me to go to Britain (which I do often) and the US (which I seldom do, but dream about often).

Only later does my economics background kick in. A lower euro, I remember, will be good for eurozone exports and hence for economic growth and jobs, including my own.

On the other hand, a lower euro will increase inflation, as imported goods become more expensive to buy. But inflation is not currently a major problem in the eurozone (although it is becoming a minor problem in Britain).

So, on balance, a lower euro is probably a good thing, given Europe’s stuttering economic recovery. Listening to the pundits, however, you would think that the euro’s recent fall is the beginning of the end for the currency.

What nonsense, even if we can’t completely rule out the possibility of a member country giving up the currency at some point.

Some history: the euro began at a value of $1.18 in 1999. It reached a low point of $0.83 in 2000, went up to around $1.60 in 2008, and is now at around $1.25. None of those values has so far meant the end of the euro (or the dollar, for that matter).

Currencies are not expressions of macho strength. They are instruments of economic flexibility. Bigger (higher) is not necessary better.

More sophisticated commentators argue that the euro is now a fundamentally weak currency because (a) the member countries have been too lax about controlling government deficits; and (b) the European Central Bank has given in to political pressure to print too much money by buying eurozone government bonds.

The euro’s recent fall has indeed been caused by policy failures rather than speculative attacks. The latter is what the German government seemed to suggest with its recent unilateral ban on naked short-selling (explained here). By the way, am I the only person surprised to see the Germans banning something that is naked?

But why should the euro remain weak? Once the policy problems have been sorted out, there is no reason why it shouldn’t rise against both the dollar and the pound.

And when it does, I will let out an unsophisticated cheer as my holidays become cheaper.