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Markets expect Euro to weaken but exchange rates are difficult to predict – Dr Dennis Novy

Commenting on the drop in value of the euro against the dollar, Dr Dennis Novy, an associate professor of Economics at the University of Warwick, said: “The Eurozone economy has been in the doldrums for years now.

“The big problem is that hard-hit countries like Greece, Portugal and Spain cannot do what such economies would normally do -- depreciate their currencies to stimulate the economy. The reason is of course that they are part of the single Euro currency and thus tied in with other countries such as Germany that are performing reasonably well.

“Another complication is that inflation has been sliding further and further away from the European Central Bank's 2 percent target. Inflation is nearing 0 percent. This brings the Eurozone close to deflationary territory, and the recent drop in oil prices isn't helping. Once consumer prices start falling, people and businesses tend to delay purchases. This can set off a vicious cycle of a stagnating economy. And this is not just a theory. Japan has been going through similar problems for over 20 years.

“There is a chance that the ECB can avoid the deflationary spiral by pumping more money into the economy. This would be a textbook solution and is comparable to the Bank of England's policy of quantitative easing. So far the ECB has been somewhat reluctant in going down that route, partly because of political pressure from Germany. But Mario Draghi's latest comments might signal a new resolve. Therefore markets are now expecting the Euro to become weaker, further spurred by political rumblings in Greece.

“However, exchange rates are notoriously difficult to predict. The Euro's slide might be short-lived if Draghi's statements are not followed up by action, or if it is too little too late."

Notes to Editors:

Issued by Lee Page, Communications Manager, Press and Policy Office, The University of Warwick. Tel: +44 (0)2476 574 255, Mob: +44 (0)7920 531 221. Email:


Lee Page, Communications Manager

Tel: +44 (0)2476 574 255

Mob: +44 (0)7920 531 221