Low euro is like a “deflation” of the Euro. Is this good or bad ?
Lets talk about devaluation.
The idea being that the goods the nation has to offer will cost less with devaluation.
Good idea, right? Many countries have resorted to this economic maneuver in order to increase exports.
The question always is: are the benefits of the drug greater than the cost of theside effects?
The same concept needs to be applied to the “Economic therapy” calleddevaluation.
Importing essential goods, like food, which must be imported because much of it is not available locally, suddenly costs more.
The increases in the cost of food adversely impacts morale.
I suggest to you that devaluation, like inflation, causes people to lose trust in the currency of the country.
The public feels ambushed by the government it has elected.
Everyone-from all socioeconomic groups-feel undermined by those they have chosen to lead their government.
Devaluation has short term benefits, but long term costs.
The benefits are easy to see: an increase in exports.
The costs are more difficult to assess or even notice.
People cut their saving, which impacts capital formation.
Consumption begins to increase as people start ridding themselves of money because it has an unstable value.
Most important of all, the lack of trust in government has its own repercussions,which are also hard to quantify, but they are there.
Devaluation is a mechanistic solution: cut prices, increase volume.
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