ZEW Survey Among Financial Market Experts: Euro Needs Structural Reforms Instead of an ECB Interest Rate Increase

At slightly more than 90 cents against the dollar, the euro is massively undervalued. Yet, the development of the euro exchange rate is still a matter of concern. An intervention by the European Central Bank, however, would be the wrong approach to prevent a possible further depreciation of the euro according to 400 financial market experts surveyed by ZEW on the current situation of the euro.

The survey shows that 70 per cent of experts consider the lack of reforms that are necessary for solving Europe's structural problems as the major strain on euro exchange rates. The opinion prevails that productivity growth and the flexibility of goods and labour markets are still greater on the other side of the Atlantic than in the eurozone. Furthermore, the experts are concerned with the poor fiscal policy discipline in many member states of the Economic and Monetary Union (EMU).

The majority of the survey participants see the differences in economic growth between the USA and the EU as a further factor that puts downward pressure on euro exchange rates. Unlike in the US, the European economy had been stagnating for a long time before slowly picking up momentum again. However, a weak euro is boosting the eurozone's export-oriented economy. The recent confidence in the euro can probably be attributed to the expectations of a stronger convergence between the US and EU business cycles.

Since the surveyed experts consider structural problems to be the main cause for the weak euro, 80 per cent of them advise the ECB not to increase interest rates, nor to intervene in the currency market to respond the current weakness of the euro.

Such ECB interventions could ultimately stall economic recovery in the eurozone without considerably improving the external value of the euro. According to the experts, the ECB should focus on maintaining price stability and convince the currency markets of the euro's reliability by way of a consistent fiscal policy.

Contact

Carlo Beck, E-mail: beck@zew.de