Eurozone fails to benefit from weak currency as oil price slides
Pity the policy makers given the job of rescuing the eurozone from deflation.
The unorthodox steps the European Central Bank has taken since June – including a programme of private-sector asset purchases – have caused a steep fall in the euro.
The weaker exchange rate will ease pressure on the ECB in its fight to raise inflation back to its target of just below 2 per cent. Mario Draghi, the central bank’s president, has said the currency’s earlier strength explains 0.4 percentage points of the fall in inflation since 2012. In that year, prices were growing 2.7 per cent a year.
But just as this depreciation is starting to fuel inflation, the ECB must contend with a fall in oil prices that all but wipes out the effect of a sliding currency. A weaker euro should swiftly raise the cost of imported energy. Instead, Brent crude has fallen 9 per cent in euro terms this month alone.
This is the main reason why eurozone inflation fell again in September to 0.3 per cent, a five-year low – a figure confirmed by data on Thursday.
A cheaper euro will also please business leaders who have long called for action to curb the value of the currency. But economists warn it is hard to tell how far this bout of depreciation will help the region’s anaemic recovery.
In the UK, despite sterling’s plunge at the onset of the global financial crisis, exports only regained their pre-crisis level in 2011. In Japan, profit margins have soared since the central bank launched its large monetary stimulus in 2013, but export volumes have not risen much.
There are also doubts over just how much difference the euro’s fall will make to exporters in different countries.
“Rich people in the Middle East will continue to buy Mercedes,” Mr Valli argues. “Italian or Spanish companies may care more about price competitiveness . . . if their products have a lower technological content and are more exposed to emerging markets competition.”
Source: FT- Eurozone fails to benefit from weak currency as oil price slides
