Falling euro, surprisingly, is good news for Europe (News Feature)

By Siegfried Mortkowitz May 20, 2010, 13:45 GMT

Paris - As the 16 nations that use the euro struggle to limit the damage of the Greek debt crisis, the value of the single currency against the dollar continues to tumble on the world's currency markets.

However, despite the gnashing of teeth this has caused in some political corners, economic analysts say there is little to fear from the drop of the euro.

At noon Thursday, after a slight rally, the euro stood at 1.235 dollars, down about 12 cents from April 1. Earlier in the week, the currency had slumped to 1.2237 dollars, its lowest level since at least April 2006.

According to Dominique Barbet, senior economist at French bank BNP Paribas, the euro is likely to fall even further, likely hitting parity - that is, where 1 euro is worth 1 dollar - by early next year.

'Today, we have an overvalued euro, so there is no reason to be concerned by the decline,' he said. 'It is far more part of the solution, rather than the problem.'

Hotel and restaurant owners across the continent certainly agree. They are probably rubbing their hands in gleeful anticipation of hordes of bargain-hunting tourists - from non-euro countries such as the United States and China - spending freely as their purchasing power grows.

Other sectors of the European economy will also be aided by the fall of the euro, as that will increase those countries' competitiveness on world markets, said Societe Generale economist Olivier Gasnier.

'Europe is going through an unprecedented crisis,' he said. 'A lower euro that increases exports with moderate inflation can only be a good thing. In fact, this is the only variable (in the European economic situation) that is truly positive.'

Barbet noted that fiscal consolidation - the imposition of measures to reduce budget deficits, such as spending cuts and tax increases - as it is now being carried out in Greece (and to a lesser extent in Spain and Portugal) has historically almost always been accompanied by currency devaluation.

'And fiscal consolidation will have to be carried out by every single country of the eurozone,' he warned. The fact that German leaders are discussing giving up promised tax cuts 'is a signal that everyone now needs to do part of the job,' Barbet said.

In addition, a report delivered to French President Nicolas Sarkozy Thursday said that an 'important adjustment of public finances' was needed to reverse the trend of budget deficits.

The report was presented during a meeting at the Elysee Palace on state deficits. It calls for a more efficient management of public spending, today and in the future.

The weak euro will also aid the eurozone's ailing child, Greece, in its efforts to emerge from its debt crisis, especially as the single currency weakens against the Turkish lira.

'Turkey is Greece's most important trading partner,' Barbet said. 'It is also Greece's biggest competitor in its most important product, tourism. The weak euro will draw tourists away from Turkey.'

Concerns that a weak euro will drive up energy prices, because crude oil is billed in dollars, are mistaken, Gasnier said.

'In fact, the barrel price of crude oil has fallen more sharply than the euro over the past few weeks,' he said.

Barbet said that if fiscal devaluation is carried out throughout the eurozone, it will put downward pressure on oil prices. 'So we are not concerned with this,' he said.

The only possible dark cloud on the horizon is a possible overly precipitous fall of the euro.

'That could create a double problem,' Gasnier said. 'It could destabilize companies, because it would make international trades difficult to manage, and it could create a loss of confidence in the eurozone, leading investors to flee from certain markets.'

It could also force the European Central Bank to intervene, to shore up the currency, he said. But such a move could only be envisaged if it were coordinated with the US Federal Reserve.

BNP Paribas' Barbet said that the main reason for the decline in the euro was that 'people are worried about the lack of coordination' in the eurozone.

'The eurozone is the only economic area in the world without a forex (foreign exchange) policy,' he said. 'Every other country has a forex policy. The Swiss, for example, openly manage their currency. A discussion will have to be held on this issue.'

This means that, ultimately, the current eurozone crisis could be beneficial for the future of the single currency.

'Europe has been built from one crisis to another,' Barbet said. 'Hopefully this one will end with progress in integration, both political and economic.'