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Upsides to a downed euro

Upsides to a downed euro

As the euro flirts with a four-year low against the dollar, analysts discern upsides for Europe and the Mideast.

May 24, 2010 4:54 by

Euro depreciation isn’t all bad for some euro zone countries, contends the head of the International Center for Monetary and Banking Studies in Geneva, Charles Wyplosz. In what many see as a reversal of fortune, analysts like Wyplosz see a declining euro as offering a competitive edge to some European economies, against a backdrop of generally expanding global economies, Bloomberg reported last week.

And for the trading partners of certain EU countries, the declining euro is equally good news. Arab states with a dollar peg will find their strengthening currencies buy more of relatively cheaper European goods. European exporter economies are poised to reap stronger foreign sales, offsetting domestic trends to consume less. Additionally, an expensive dollar will make US exports less competitive, as European goods decline comparatively in price, analysts say.

Regional observers are echoing the sentiment. Market analyst Joseph Trevisani, speaking in Beirut last week, said the weaker euro offers expanded buying power for dollar pegged currencies, while putting a downward pressure on inflation.  The chief market analyst at US-based trade firm FX solutions told the Daily Star that Lebanon’s buying power with its European trade partners is set to surge 60 to 70 percent as the country looks to import European goods against  a backdrop of a strengthening dollar and a weakened euro.

Other potential benefits for the region may play out over the longer term. Lessons from the common currency of the euro zone will inform the decisions of the GCC monetary union members, as they contemplate an EU-style monetary union.

“We are watching as the euro goes through a crisis,” Bahrain’s Finance Minister Sheikh Ahmad bin Mohammad al-Khalifa said earlier this month. “What we need in the Gulf is a currency with sound fundamentals.”

Hard-learned lessons in the euro zone will be carefully considered by policy makers in the GCC. The fallout from the 16 European member experiment with a unified monetary policy will provide insights into the pitfalls of uniting distinct economies in what skeptical economists call a “one-size-fits-all” monetary policy.

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