Growth prospects ‘boosted’ by fall of euro

THE euro’s fall from grace will boost the growth prospects of the region, according to a new report.

It has fallen by 8% on average against the other major currencies since the start of the year, driven by the Greek fiscal crisis and fears about the currency’s future.

In his latest analysis Dan McLaughlin, chief economist, Bank of Ireland, says weaker growth prospects for the region is also a significant fact in the currency’s decline.

Half the of the loss has happened in the month of May alone, he said.

The euro is also at a four-year low against the dollar and Mr McLaughlin reckons that based on the growth prospects of the two economic blocs the euro has moved closer to “fair value” given the unsettled backdrop for the euro area.

Against the dollar, decline has been nearly double the average 8% fall, at 15%, that has seen the currency pushed to below $1.22 at times, and to levels not seen since 2006.

These new rates are a “far cry” from the high of $1.60 achieved two years ago, he said.

“The speed of the recent fall appears to have unnerved some European policy-makers but the decline in the euro is appropriate given recent economic developments,” he said.

Statistics show the eurozone grew by just 0.2% in the six months to end-March, against 0.7% in Britain and 2.2% in the US.

That wide divergence has had a significant impact on interest rate expectations with investors punting on US rates to move much faster than those in Europe, he said.

Two-year interest rates in euro are trading at 1.35%, close to the US rate of 1.25%.

Sentiment has in effect changed significantly and investors are no longer receiving a significant interest rate premium to hold euro over dollars which also helps explain the loss in value by the single currency, he said.

Fears of a Greek debt default and political confusion surrounding the subsequent bailout has also hit confidence in the euro, he said.

“Even if the fiscal crisis had not happened the single currency would probably have fallen anyway given its mediocre growth performance,” said Mr McLaughlin.

A fall in the euro reduces the spending power of consumers, but represents a potential benefit for producers selling into dollar markets, he said.

Growth in the eurozone should benefit from the currency’s fall as it should help export sales, he said.