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parts of the country, and that these subsidies will be paid for by slapping a tax on products made in economically stronger regions that are sold in the weaker region. It should be obvious that this would distort competition to the disadvantage of more efficient and well-run businesses in the economically stronger parts of the country. But the effect of a weaker currency is in fact identical to the effects of a combined import tariff and export subsidy.

To take a specific example of this which is very similar to recent actual exchange rate movements, assume that the Swedish krona falls in value, so that a euro cost 10 kronor instead of 9 kronor before, which in inverted terms means that the value of the krona falls from €0.111 to €0.10. This means that Euro area goods suddenly become 11.1% more expensive for Swedes while Swedish goods suddenly become 10% cheaper for Euro area residents23. Imagine instead that Sweden had been part of the euro area and that currency depreciation of this kind thus would not have been an option, and that Swedish politicians instead would have slapped on an 11.1% tariff on imported goods from the euro area while also providing all euro area residents a 10% subsidy on all goods from Sweden. What would be the difference, except for the formal technicalities? The answer is: none at all, the effect in meaningful economic terms would be identical. Because it, in formal terms, would be such a blatant form of subsidy to businesses in sectors of tradable goods, this would be forbidden by EU rules, but the more hidden form of currency depreciation.

23 For simplicity it is assumed that neither Euro area nor Swedish exporters change their prices. If they did, that wouldn’t change the impact for businesses that instead would lose/profit from lower/higher profit margins instead of lower/higher mar- ket share. The similar consideration would also be applicable to the alternative combined import tariff/export subsidy which this paragraph is meant to illustrate the similarity with.

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