Hands Off the "Super-Euro"

Three years ago, the European single currency, the Euro, was born at an exchange rate of 1:$1.17, which presumably was deemed to reflect appropriately price levels on both sides of the Atlantic at that time. The Euro's exchange rate has since endured a roller-coaster ride. Now, it has returned to almost exactly its opening level. So why is the European business community claiming that the "super Euro" is bringing calamity down upon their heads?

The answer is that blaming the Euro is an easy way to deflect attention from the true cause of Europe's economic malaise: a surprisingly low level of productivity per capita. Europe's low productivity reflects a simple statistical fact that fatally undermines relatively high productivity per hours worked: weak participation in the active labor force means that Europeans work a very low number of hours.

It is important to clarify a few fundamental points regarding the Euro/dollar exchange rate, because this is an issue on which confusion--often generated strategically--pervades public debate.

First, nobody knows how to explain or predict the short-term movements (from one day to six months, say) of exchange rates. A famous academic paper about 20 years ago showed that a random walk was better at predicting short-run exchange rate movements than any fancy mathematical model based on selected economic variables.