A weaker euro would be better?

NauschniggThe weakening of the euro against the Chinese currency would play a crucial role in the improvement of the economies of Southern European countries. This would also mean a weakening of the euro against the US dollar.

Franz Nauschnigg, the Head of European Affairs and International Financial Organizations Division of the Austrian National Bank (OENB), claims that Chinese competition has been strangling Southern European countries for years. China has occupied all the positions on the Western European markets that had traditionally and stably served the Southern European economies’ living and development.

The financier states that besides the inevitable structural reforms, the euro should weaken against the yuan, which can only be realized, if it also weakens against the dollar. He says that the dollar will strengthen and that the euro – dollar exchange rate will move in a range of 1.20 to 1.30. However, Nauschnigg warns the central banks and governments of smaller and heavily import dependent European countries not to devalue their currency.

Zentai Peter: In your article ‘A Weaker Euro for a Weaker Europe’, one of your major messages is that the crisis around the Eurozone can be solved by foreign exchange intervention. Is that right?

Franz Nauschnigg: No, I am not talking about foreign exchange intervention. It is broadly and wrongly believed that the imbalance in the Eurozone is due to the surplus of Germany and the deficit of crisis countries – mainly in the periphery of the area such as Spain, Greece, Italy, and Portugal. This was true nearly ten years ago but today the reason for the imbalance is not Germany but China. So what we need is not intervention but a weaker euro compared to the yuan. Essentially, the revaluation yuan would help.

How should we push China to devalue its currency? The United States has been trying to bring pressure to bear on China to revalue the yuan for a long time. However, it has not been a successful attempt.

The way I am looking at it, it was successful for the US since the Chinese financed the American deficit by buying US government bonds. However, China looks at the EU differently. It is not because the weaknesses of the EU as an economic power. The United States also has its weaknesses. The main reason is that the member states of EU often do not act or work together. By all means, the weakness and weakening of the Chinese currency causes a lot of damages to the Eurozone…

What would you suggest realistically? Ultimately, the euro should be devalued?
There are two issues: the first is the exchange rate I have already mentioned, the second is the economic structure of the peripheral countries. These countries have less sophisticates economies than those of Germany or Austria. All of them have come into direct competition with China as their main exporting goods are textiles, shoes and clothing. China has taken over this leading role of exporting on the EU markets. If these Southern European countries changed their industrial structure, it would also help. For us Austrians, Germans or Finnish, China is no direct competition as we are still stronger in car manufacturing and machinery.

How could the euro start weakening?

It should not be only a bilateral thing between Europe and China. The yuan is moving simultaneously with the US dollar. Hence, if the euro becomes weaker against the dollar, we achieve something. If the euro and interest rates in the euro area – as we have seen in recent weeks – become lower than those in the US, there is a potential that the euro devalues against the dollar. And if the euro devalues against the dollar, it automatically devalues against the yuan.

Whenever the dollar strengthened in the last few weeks, the FED or the US government immediately intervened to push back the dollar.

Neither the US nor Europe is intervening in the foreign exchange rate. In my view, if the USA is growing faster, it gets higher interest rates, and consequently, the euro becomes weaker against the dollar. I am not in favor of an intervention, neither on European side.


What do you think would be the optimum exchange rate between the euro and the dollar in the next months?


There are different exchange rates depending on the model we use. Somewhere between 1.20 and 1.30 would be the equilibrium exchange rate.


If you look at the Eastern European countries of the Eurozone such as Hungary, you may see that these countries are trying to push down their own currency.


In the end, exchange rate devaluation does not help. In the short term, there might be a plus for the economy but in the longer run, interest rates will grow because they bear the exchange rates risk. In the 1980s and early 1990s, we Austrians had a fixed exchange rate against the German mark while the Swedish devaluated their currency. Eventually, it turned out that we made a better decision because we made a real adjustment and not only an exchange rate adjustment. However, the Swedish fell back as their internal and external deficit increased, interest rates rose, and there was a hugeinflation. A smaller country is much more exposed to inflation than a bigger area, like the Eurozone.


Would other countries of the Eurozone profit from the weakening of the euro against the yuan besides the periphery countries?


Yes, countries like Austria and Germany would also profit from that, however, not as much as the Southern European countries. As I have mentioned before, they are not in direct competition with the Chinese because their industrial structures are different. But they might benefit from the commercial relations and trade with the US. Since the US is growing faster than Europe, imports will also increase faster.


Do you think that the crisis around the euro and the Eurozone is over?


The crisis is not yet over but we have done a lot to solve it. We have created financing mechanisms at the Eurozone and at EU level. Currently, we are about to create a European banking union which will help us to better manage the crisis.