Milan – Economists forecast that the 16-country currency Euro could head for a major decline due to the current debt crisis in Europe. Infact, according to some economists, the value of euro may even fall further by the year 2011 to what can be called as the parity against the US dollar i.e. Euro1 equaling $1, that which was witnessed in the year 2002 July, but this also reflects an 18% slide from $1.23 on Friday.

Although, a decline might bring down the overall value of the currency and it would even cut down the buying power of the European governments for imports, but the gradual decline might lead the slide in the Euro’s exchange rate encouraging exports while providing lift to the already disturbed European economy. This would make the export-based companies more competitive on pricing of goods outside the eurozone which would augment the revenues helping the European countries combat the current financial crisis in the continent.

Since the majority of the Asian countries like China and India link their currency to the dollar, the Euro might get more weakened in that aspect but might help good trading with Asian countries, as the exports have been a major factor in boosting the European economy out of recession.

In the Q4 of 2009, there was a rise of 1.9% of the exports compared to the earlier quarter and that amounted to about Euro838 billion which can also be regarded as 36% of the economic output gained from outside the Europe. And according to EU statistics, the eurozone’s exports have seen a good rise of 22% to Euro134.9 billion at the end of Q1 in 2010, up from Euro110.3 billion earlier this year.

According to some other economists, a lower euro could help put off the ill effects of the spending cuts and increased taxes that are already in the debt driven countries like Greece, Spain, Portugal and Italy. Such austerity measures would somehow insure the countries in defaulted debt before the investors start refusing to purchase new issues of government debt in these countries where the euro is already weak, thereby avoiding major decline in the currency.

However, economists even warn that more than these measures, it is about getting structural reforms that would pull the investors on their side, at the moment. And this would mean implementing stringent rules on controlling deficits to avoid them recurring in future, and also cutting down on some regulations that discourage job creation.

They also add that the weaker euro might be good for Italian companies as they mostly deal with the businesses outside the eurozone, and the Italian firms effectively compete both abroad and at home if the value of the euro is around $1.20. On the other hand, Germany may get less from this on its exports deals as they are quality based and not dependent on any kind of currency fluctuations, but products like light manufacturing, textiles, shoes, etc can be of good benefit to the country.

[Source – AP]