The Economist explains: If the European economy is so shaky, why is the euro so strong?

Posted: November 18, 2013 in economy
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THE euro zone is looking healthier than it has in some time, but that is not saying much. The long-suffering economy pulled out of recession earlier this year, unemployment is levelling off, and crisis worries continue to ebb along with government borrowing costs. Yet growth may struggle to top 1% next year, which in turn is generating fear of deflation. European firms and households remain stuck under piles of debt. Earlier this month, amid signs of new economic weakness, the European Central Bank (ECB) cut its benchmark interest rate to 0.25%. From late 2009 to mid-2012 the euro weakened as Europe’s debt crisis deepened. But since July of last year the euro has been on a tear, and it is now back to 2007 levels. After half a decade of financial gyrations, investors seem as eager to hold euros as ever. If the European economy is still shaky, why is the euro so strong?An appreciating currency can cause serious problems. Exchange rates are an important determinant of the price of a country’s goods on world markets. If American car prices hold steady while the dollar strengthens, then the cost of American cars in yen or euros rises and America will sell fewer of them abroad. Europe has more reason than most to fear a strong currency. With firms, households and governments all cutting back, Europe is reliant on exports to drive growth and hiring. Some European …

via Economic Crisis http://www.economist.com/blogs/economist-explains/2013/11/economist-explains-10?fsrc=rss

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