Don’t tell me the ‘currency war’ is bad for European exports – the one graph version

It is said that Europe is the biggest “victim” in what is said to be an international ‘currency war’ (it is really no war at all, but global monetary easing) as the euro has strengthened significantly on the back of the Federal Reserve and Bank of Japan having stepped up monetary easing.

However, the euro zone is no victim – to claim so is to reason from a price change as Scott Sumner would say. The price here of course is the euro exchange rate. The ‘currency war worriers’ claim that the strengthening is a disaster for European exports. What they of course forget is to ask is why the euro has strengthened.

The euro is stronger not because of monetary tightening in the euro zone, but because of monetary easing everywhere else. Easier monetary policies in the US and Japan obviously boost domestic demand in those countries and with it also imports. Higher American and Japanese import growth is certainly good news for European exports and that likely is much more important than the lose of “competitiveness” resulting from the stronger euro.

But have a look at European exporters think. The graph below is the Purchasing Managers Index (PMI) for euro zone new export orders. The graph is clear – optimism is spiking! The boost from improved Japanese and American growth prospects is clearly what is on the mind of European exporters rather than the strong euro.

PMIexport euro zone

Leave a comment


  1. Lars, differently from Brazil, Europe is still able to satisfy the increased demand!

  2. fsateler

     /  February 19, 2013

    Interesting. But, couldn’t we also say that global monetary easing means some of that easing is being imported into Europe? Is there a way to measure that?

    • fsateler, I clearly think that the euro zone is “importing” monetary easing at the moment. That is visible from the financial markets – European stock markets are rallying and implicit market expectations for future inflation in the euro zone have been increasing. Indirectly this is also visible in peripheral bonds yields – such as Italian and Spanish government bond yields, which have declined significantly.

      Most likely we are at the moment seeing a relatively large increase money-velocity in the euro zone and that is obviously monetary easing. I am sure Mario Draghi is aware – and happy – about that. However, if this continues for much longer I would certainly expect the Bundesbank to start to talk about “inflationary risks”. That said the euro strength is probably keeping ECB hawks silent for now.

  3. Ravi

     /  February 19, 2013

    Lars, this is off-topic, but I know you have a strong interest in economics education… is there a textbook in English that does a reasonable job of expressing your views on macro?

  4. tesc

     /  September 26, 2013

    Lars, I am an economics educator. I have Mankiw as the textbook but I thought about using Cowen’s as resource. What topics or chapters from Cowen do you recommend to supplement Mankiw ?

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