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

Authors

  • Ansgar H. Belke University of Duisburg-Essen & IZA Bonn University of Duisburg-Essen, Faculty of Economics and Business Administration, Universitätsstraße 12, 45117 Essen, Germany
  • Ulrich Volz SOAS, University of London & German Development Institute SOAS, University of London, Department of Economics, Thornhaugh Street, Russell Square, London WC1H 0XG, United Kingdom

Keywords:

Euro Exchange rate, European Central Bank, Monetary Policy, Foreign Exchange Intervention, Currency Wars

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.

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Published

2021-09-01

How to Cite

Belke, A. H. ., & Volz, U. . (2021). The Strong Euro: Challenges for the European Central Bank and Implications for the Global Economy. AEI INSIGHTS, 1(1), 53–68. Retrieved from https://ejournal.um.edu.my/index.php/AEIINSIGHTS/article/view/31690