The One-Size Euro Mightn't Be So Tight After All

It's a given that the euro can't have the right exchange rate for all of its 19 diverse members, all of the time. Yet at the helm of the European Central Bank, Mario Draghi may be making it a closer fit for more countries, more of the time.

Angel Talavera, an economist at Oxford Economics in London, has calculated for Bloomberg Benchmark what would have been the “equilibrium” exchange rate for 8 euro-area economies between 2011 and 2015 − the rate that would be best suited to an economy's domestic and external profiles.

As the map shows, Germany's economic strength and positive balance of payments would warrant the euro trading at around $1.40, while Greece's woes would require it to be below parity with the dollar. At the beginning of Draghi's term, the euro was too strong for pretty much everyone, and has typically aligned itself more to the needs of “core” economies, Germany included. That hasn't been helpful.

“What would normally happen with a country that has its own currency is that the currency will appreciate or depreciate over time to help correct those imbalances,” Talavera said. “In the case of the Eurozone obviously you can’t have both things happening, so those imbalances are not correcting, but rather amplifying most of the time.”

His calculations bear this out. At the height of the sovereign-debt crisis in 2011 the spread between the optimal rate for Germany and Greece was $0.32. By the end of last year the gap had widened to $0.42.