Question

(Related to the Apply the Concept on page 1067 ) An article in USA Today argued, "lronically, the euro's falland the benefit for German exports -is largely the result of eurozone policies that Germany has taken the lead in opposing ... [including] easier money policies by the European Central Bank." a. How does the "euro's fall" benefit German exports? b. How is the euro's fall related to policies of the European Central Bank?

Short answer

a. The euro's fall benefits German exports by making them cheaper and more attractive in the international market. b. The euro's fall is related to the policies of the European Central Bank because easier money policies tend to lower the value of a currency, in this case, the Euro. However, at the same time, it is noted that Germany has opposed such policies, possibly due to concerns over price stability and inflation.

Step-by-step solution

Understanding the impact of currency value on Exports

In an international trade context, if the value of a country's currency falls (in this case, the Euro), the price of its exports becomes more competitive in the global market. This happens because a weaker currency means foreign buyers need less of their own currency to buy the same amount of goods. So, for a country like Germany, a fall in the euro's value would make their exports cheaper and thus increase their overall exports. This ultimately benefits the German economy as it can lead to a trade surplus and economic growth.

Relating currency value to Central Bank's Policies

The value of a currency can be significantly influenced by the policies of a country's central bank. Central banks like the ECB can adopt 'easier money policies' or 'expansionary monetary policies', which involve measures such as lowering interest rates or increasing the money supply. Such measures can lead to a fall in the value of the currency as lower interest rates discourage foreign investments causing the demand for the currency to decrease. Consequently, the currency's value falls which, as discussed earlier, would benefit German exports.

Recognizing the significance of German opposition

Interesting part of this scenario is that Germany has reportedly opposed the very policies causing the euro's fall. This could be key to understanding the broader dynamics within the Eurozone, with Germany's perspective possibly focusing more on price stability and avoiding inflation, as these easier money policies could also lead to rising inflation if not regulated properly.

Key concepts

Exports Competitiveness

When a currency's value decreases, the exports from that country become cheaper for international buyers. Let's break it down. Imagine you're buying a chocolate from Germany, and normally it costs 10 euros. If the euro's value falls, you would need less of your own currency to buy that chocolate.
This price drop makes German products more attractive to foreign consumers, leading to an increase in demand for these exports.

• Lower currency value means German goods are more competitively priced.
• Increase in demand can lead to more sales and higher profits for German exporters.
• Potential trade surplus as exports may exceed imports.
• Helps boost the economy by creating jobs and increasing GDP.

Therefore, a weaker euro improves Germany's exports competitiveness in the global market, providing a significant economic advantage.

European Central Bank Policies

The European Central Bank (ECB) plays a crucial role in determining the euro's value through its monetary policies. When the ECB opts for policies that make money more accessible, it can have far-reaching effects on the euro.
These policies include:

• Lowering interest rates, which decreases the cost of borrowing money.
• Increasing the money supply by purchasing government securities or other means.

By implementing such strategies, the ECB essentially makes it less attractive for foreign investors to hold euros as the returns on investments diminish.
This usually leads to a decrease in demand for the euro, thus causing its value to drop. As explained earlier, a lower currency value can boost exports, which is a significant outcome of these policies. Understanding these policies helps in grasping how interconnected currency value and central banking decisions can be.

Expansionary Monetary Policies

Expansionary monetary policies are a set of actions taken by central banks to stimulate economic growth. They are often used to counteract economic slowdowns and encourage borrowing and spending. But how do they impact currency value?
Some key components include:

• Lowering interest rates to make credit cheaper and incentivize spending.
• Purchasing assets to inject more money into the economy.

Such actions can lead to increased money supply and lower interest returns, often causing the currency to depreciate.
The downside is that these policies can also heighten the risk of inflation, which is why a country like Germany might oppose them.
While expansionary policies may benefit trade by making exports cheaper, they require careful management to avoid destabilizing the economy. Understanding these implications allows for a comprehensive view of how central banks like the ECB influence economies through currency manipulation.