Can Europe Save Itself by Weakening the Euro?

The euro celebrates its 16th birthday this month, and like a lot of teenagers, it’s hitting some rough patches. The currency has fallen 14 percent against the dollar over the past year, to $1.17 on Jan. 14, its weakest level in almost a decade. While he’s keen to avoid sparking an international currency war by actively encouraging its slide, European Central Bank President Mario Draghi is doing almost nothing to prop up the euro. That’s because a weak currency could be the region’s best shot at reviving its stagnant economy.

Exports account for almost half of Europe’s gross domestic product, compared with less than a fifth of U.S. and Japanese GDP. By making European goods more competitive, both at home and abroad, a cheaper euro could help boost growth and inflation. The ECB’s economic models suggest that a 5 percent decline in the euro’s trade-weighted exchange rate might lift GDP by 0.3 percent and inflation by as much as 0.5 percent. That may not sound like much, but it would be welcome news: The ECB expects the euro area to grow by just 1 percent this year, with an inflation rate of only 0.7 percent.