The Compass

« How Bad Is China's Air Pollution? | Blog Home Page | Is China Blowing Another Huge Bubble? »

Why Europe Fears a Currency War

The head of Germany's Bundesbank, Jens Weidmann, warned yesterday that the world could be nearing a currency war. Felix Salmon explains why he's right to be worried:

It’s easy to see what Weidmann is worried about here: according to UniCredit economist Marco Valli, a 10% rise in the euro’s value will reduce eurozone GDP growth by 0.8%.

Needless to say, the Eurozone has no such wiggle room. But Salmon offers a caveat:

Firstly the euro is still much more competitive, against the yen, than it was before the crisis. Here’s the five-year chart, which shows that if there’s any competitive devaluing going on, then Europe did it first.