Tags: Wharton | Siegel | Europe | Euro

Wharton’s Siegel: Europe Will Have to Devalue Euro to Save It

Friday, 11 May 2012 08:05 AM

Crisis-ridden Europe will have to weaken the euro against the dollar in order to save the economy, says Wharton finance professor Jeremy Siegel.

The European Central Bank has flooded the economy with liquidity to keep financial systems afloat and stave off the debt crisis.

Measures have included making low-cost loans available to banks so they'll lend to even stepping in directly and injecting banks with liquidity, a tool known as quantitative easing.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Devaluing the euro would help even more, as it would make servicing debts easier and exports more competitive outside of the continent and fuel more growth in hard-hit countries like Greece, Siegel says.

Meanwhile market talk is growing Greece will default on its debts and go back to the drachma, especially with leftist political parties gaining ground in parliament.

"Europe is a big mess," Siegel tells CNBC.

"Greece leaving the eurozone — I think they would love to leave if they could figure out how. The ECB, in an attempt to save the union, will lower the euro."

The euro is trading around 1.29 per dollar although anything closer to parity would help.

"Will that save the periphery?" Siegel says. "I give it a 50-50 chance."

The euro has hit a three-month low against the dollar lately due to fears inbound governments in Greece and France will scrap austerity measures and instead spend their way out of the debt crisis.

Despite Greece's inability to form a coalition government in wake of recent elections that pushed traditional political parties out of power, the country remains on track to receive a bailout tranche in June.

Spain, meanwhile, bailed out another bank, although market watchers warn the crisis is not over despite a reprieve in foreign-exchange and stock markets.

"Governments in Europe must restore investors' faith in their ability to contain the debt crisis and guide the eurozone back onto a stable footing, if equities are to recover long-term," says Jimmy Yates, head of equities at CMC Markets, according to Reuters.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.


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2012-05-11
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