One should not count on a depreciation of the euro to boost euro-zone growth. It is often claimed that a sharp depreciation of the euro is needed to stimulate growth in the euro zone, and that the divergent monetary policies between the United States and the euro zone will pave the way for the euro to depreciate.
We believe one needs to be much more cautious:
– It is not certain that the euro will depreciate much: its recent depreciation has been due primarily to speculative positions, which may reverse, and not to outflows of long-term capital; moreover, the euro zone has a large external surplus that will be difficult for capital outflows to offset;
– Even if the euro depreciated significantly, the effect on euro-zone activity would be non-existent or even slightly negative: the price elasticity of euro-zone exports in volume terms is low (0.20, due to the high weight of German exports) and a depreciation of the euro would push up the price of euro-zone imports, while their price elasticity in volume terms is zero.
