Who Pockets the Gains from a Weak Euro?
New EU stimulus measures will begin next month with aggressive purchases of asset-backed securities and covered bonds, and will eventually increase the ECB balance sheet by approximately €1 trillion. Among their touted benefits—higher asset prices, increases in bank lending and employment, rivers of milk and honey—many expect an upswing in exports, as the depreciation of the euro will make them cheaper and more attractive to foreigners. In fact, because Eurozone monetary inflation lagged behind the Japan and the U.S. in recent years, it has—among other things—turned the exchange rate against European exporters. “Perhaps the main immediate benefit of the additional policy action is a weakening of the exchange rate,” claims the chief economist of Markit, Chris Williamson. “The lower exchange rate will undoubtedly provide a boost to exporters’ competitiveness.” Mises dealt with the alleged stimulating effect of inflation on trade for the first time in 1907 in an essay titled “The Political-Economic Motives of the Austrian Currency Reform”. Mises explained that interest groups in Austria at the end of the 19th century pushed for currency reform so as to favor their commercial ventures. The depreciation of the Austrian florin which followed “functioned like a protective tariff against the import of foreign manufactured goods, and assisted the export of domestic products like an export premium” (Mises 2012 , 13). European interest groups are nowadays after the same advantages, and luckily for them, the ECB is ready to deliver. After the stimulus was announced, the euro fell below $1.3 for the first time in more than a year. The export premium will originate from the fact that the exchange rate is adjusting faster to the new purchasing power than the structure of domestic prices in the euro bloc. As the latter changes gradually, exporters (albeit not all of them) will be paid higher prices for their products while the prices of factors of production and the goods they buy have not yet risen. The monetary gain they’ll pocket is part and parcel of the redistribution of wealth that accompanies the revolution in prices. Mises added detail to his analysis in 1912, in The Theory of Money and Credit:
Speculation on the foreign-exchange and security markets anticipates coming variations in the exchange-ratios between the different kinds of money at a time when the variations in the value of money have by no means completed their course through the community, perhaps when they have only just begun it… During this interval […] we are here again confronted with a re-distribution […] the result is always that the gains of foreign buyers, which in certain cases are shared with home exporters, are counterbalanced by losses that are borne entirely at home (Mises 2009, 214-15).
Exporters are favored as the first receivers of new money—at the expense of late receivers—only as long as the redistributive effects of inflation are ongoing, renewed, or not matched by competitive devaluations. What helps exporters pilfer handsome gains from trade is not a low exchange rate, but the inflationary process of lowering it.
Sooner or later, the prices of all domestic goods and services will adjust to the change in value of money, and the advantages that a devalued currency offers to production, and the obstacles that an overvalued one sets against production, will disappear. […] Every attempt to promote a single interest group through selective changes in the value of money must inherently fail, ignoring all other reasons, because the economic effects of this kind of measure are only temporary; in order to maintain those effects there would have to be a continuing increase of the notes (Mises 2012 , 29; 26)
It should also be mentioned that Mises’s early analysis—which employs the purchasing power parity theory of exchange rates—was published nine years before Gustav Cassel’s 1916 version, which gained international recognition. A testimony, if any more was needed, to Mises’s ingenuity and acumen.