Can the Euro Zone Use Beggar-Thy-Neighbor Policies Against the Rest of the World?

by Dirk Ehnts, Econoblog101

The euro zone is running a policy now that relies on weakening the euro. The depreciation of the euro will increase aggregate demand, at least in the medium to long-term, so policy makers seem to hope. However, it is widely unrealistic to think that other countries and regions will not retaliate with their own economic policies, quantitative easing and otherwise.

The NY Times reported some two weeks ago:

A number of countries – China most prominent among them – have long acted to hold down the value of their currencies against the dollar, helping their industries by keeping exports to American consumers cheaper and making goods from the United States more expensive.

And while every president from Bill Clinton on has repeatedly criticized the practice, none have ever taken formal action against China or any other nation to try to stop it.

Now, a growing bipartisan majority in Congress is coalescing around a demand that could derail President Obama‘s ambitious trade agenda before it really gets moving: include a robust attack on international currency manipulation or no deal.

The logic of turning the euro zone into a net exporter and running this as an economic strategy is flawed. While inside the euro zone the trade partners with the current account deficits had no choice but to take that position (what economic policy existing at that time could you have used to prevent them?) are in a deep crisis, the rest of the world has nominal exchange rates which can be adjusted. It will be interesting to see what the political economy dimension of this is. US gets TTIP, the euro zone gets a low exchange rate vis-a-vis the US dollar? Whatever it will be, the people get to vote on whatever those in power decide on.