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Euro's Drop Raises Questions About Its Long-Term Prospects

LINDA WERTHEIMER, HOST:

In in this country, unemployment is dropping, gas is cheaper than it's been in years and GDP is on the rise. But in Europe the financial picture is not so rosy. The euro hit a nine-year low against the dollar yesterday, raising new questions about the long-term prospects for Europe's single currency. Callum Williams covers the European economy for The Economist magazine. We reached him on the line in London.

CALLUM WILLIAMS: Good morning.

WERTHEIMER: So why is the euro dropping?

WILLIAMS: Well, there's two reasons, really. The first is that there have been signs in the last few days that the European Central Bank, the ECB, is kind of on the verge of engaging in what the Fed, and what the Bank of Japan and what the Bank of England have done, which is quantitative easing. Now what that means is buying the debt essentially of countries in the eurozone. And the reason they'll probably do that is in order to basically - to increase finance, to increase an equility (ph) to the financial system.

Now the euro falls because of that because essentially there'll be more euros sort of floating around. So that's the first reason the euro's falling. And then the second reason is because there is now going to be, on January the 25, an election in Greece, which was sparked by various, complicated, political sort of processes. But there will be an election in Greece in the next few weeks. And most likely someone a - someone who used to be considered part of the radical left, but is now kind of moving slightly towards the center, but someone who sort of scares investors is probably going to become the next Greek prime minister. And that means that people who hold euros - investors who hold euros - are kind of thinking maybe this isn't, you know, maybe I don't want to have euros anymore. So they're selling them. So that's also pushing the price of the euro down.

WERTHEIMER: Does it automatically mean, when the euro is weak, that European economies are weak?

WILLIAMS: No. I mean, one of the things that people have been saying for a long time is that especially the weaker eurozone members - so we're looking at Greece, Portugal, Italy, Spain, to a lesser extent France - the way they're going to get out of the economic doldrums that they find themselves in at the moment is through exporting. And of course a weak euro makes those exports cheaper from those countries. And indeed, I mean, as the euro has fallen in value the trade position of the eurozone has improved. So, no, I mean, it's not a bad thing in itself that the euro is falling, but it is a sign that investors are getting worried about the future park of the euro as a whole.

WERTHEIMER: Tomorrow the Consumer Price Index for Europe comes out. We're hearing those numbers will show Europe headed for deflation. What would that mean, and how bad would it be?

WILLIAMS: So deflation is where prices on a sort of yearly basis are falling. And that has a number of bad consequences. One is that the economy tends to slow down because if you're going to buy a car, and you reckon that this time next year the car will be cheaper because prices are falling, then you tend to postpone that purchase of the car. And if everyone does that it, means that the economy sort of grinds to a halt. So deflation really worries economists.

WERTHEIMER: What do you suppose all of this means for people on this side of the Atlantic, which is where we and the United States are just beginning to be confident that our economy is roaring back?

WILLIAMS: Well, that's a very good question. I mean, a lot of people, say in Britain as well, are kind of looking at the eurozone and the sort of thinking thank God we didn't enter. And, you know, feeling rather smug about the whole thing. In practice though, this is actually really, you know, bad news for the rest of the world, particularly America and the U.K. America's a large trading partner with the eurozone. The eurozone is Britain's largest trading partner. And so if, you know, if those economies are weak, if people in those countries are not importing American goods, British goods, then the economic recovery could be kind of disrupted. And so even if you're not in the eurozone, this is still an important story.

WERTHEIMER: Callum Williams is economics correspondent for The Economist magazine. We reached him in London. Thank you very much.

WILLIAMS: Thank you. Transcript provided by NPR, Copyright NPR.