Restoring sustained growth requires real currency depreciation.

Only a return to a national currency and a sharp depreciation of that currency can restore competitiveness and growth.

But all of the options that might restore competitiveness require real currency depreciation.

With China retaining its under valued currency policy, dollar depreciation can aggravate global deflationary forces.

The attempt to achieve them is bound to lead to competitive currency depreciation and protectionism.

A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits.

When this pattern is combined with the depreciation of the new Israeli shekel (NIS) in 2003 and then its appreciation in 2004, it is clear that while the Palestinian trade balance does not benefit from the depreciation of the Israeli currency, it suffers the full negative impact of currency appreciation.

To restore growth, these countries must also regain competitiveness by achieving a real depreciation of their currency, thus turning trade deficits into surpluses.

There is a widespread suspicion that the US is deliberately pursuing dollar depreciation (or currency wars, in the words of Brazil s finance minister).

Currency depreciation is not a feasible option for all advanced economies they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time.

The federal government s budget deficits were financed through foreign and domestic borrowing, and by printing money, which led to inflation and depreciation of the new currency.

In the aftermath of the international financial crisis of 1997 1998, many emerging markets found themselves through currency depreciation, rapid productivity gains, or both highly competitive.

Meanwhile, massive corruption is devastating Egypt s economy, with growth falling by half in the last two years, accompanied by rising unemployment, higher inflation, and currency depreciation.

They would be compensated for inflation and currency depreciation in the US and Europe, since the payout would depend on these economies nominal, not real, GDP.

But the euro s depreciation is too recent to have made much difference yet. Historical evidence, not to mention Japan s experience with a falling yen, suggests that it takes several quarters, or even years, before the positive impact of currency depreciation on net exports is felt.

Because these options cannot work, the sole alternative is an exit from the eurozone by Greece and some other current members. Only a return to a national currency and a sharp depreciation of that currency can restore competitiveness and growth.

The European Monetary System began as a high level reaction to global currency chaos, and in particular to the depreciation of the dollar in 1977 and 1978, which seemed to threaten its continued role as the major international reserve currency.

The eurozone s peripheral countries, including Greece, Portugal, Ireland, and Spain, found themselves pinned to the mast of the common currency, unable to gain competitiveness through exchange rate depreciation.

The traditional remedy for countries caught in the kind of crisis that Spain, Greece, Portugal, and Ireland find themselves in is to combine fiscal retrenchment with currency depreciation.

China s Daring Depreciation

So the way out of the European conundrum currency depreciation risks being blocked by the market s perception that the ECB and the Fed are at odds over monetary policy.

In the last two months of the year, the dollar experienced a sharp depreciation of 10 per cent, contributing to the overall moderate foreign currency exchange impact for the year.

With China retaining its under valued currency policy, dollar depreciation can aggravate global deflationary forces. Yet a mix of political factors has led to stunning refusal by policymakers to confront China.

Will foreign governments and the International Monetary Fund extend vital finances to the new government, or will they let it flounder and drown in a tsunami of currency depreciation and inflation?

And yet risks to financial and fiscal stability could arise if higher inflation and currency depreciation were to spoil investors appetite for Japanese government bonds, thereby pushing up nominal interest rates.

Its purpose is not to encourage the depreciation of the yen, despite complaints about the yen s depreciation.

China s currency policy means that dollar depreciation, rather than improving America s trade balance and stanching its leakage of jobs and investment, may inadvertently spread these problems to the rest of the world.

The nominal increase translated into a significant decline of actual resources available, primarily due to the impact of the depreciation of Usthe United States dollar against the secretariat's functional currency, the Euro.

If none of those three options is feasible, the only path left is to leave the eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

But, in a world where China links its currency to the dollar at an under valued parity, the dollar s depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession.

If China, emerging markets, and other surplus countries prevent nominal currency appreciation via intervention and prevent real appreciation via sterilization of such intervention the only way deficit countries can achieve real depreciation is via deflation.

The balance sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies.

Those with large amounts of reserves know that holding dollars is a bad deal no or low return and a high risk of inflation or currency depreciation, either of which would diminish their holdings real value.

And that means further depreciation of the dollar.

The extent of creditor countries losses would depend on the extent of the depreciation, giving them an interest in keeping the depreciation within bounds.

But fear not, claim advocates of unconventional monetary policy. What central banks cannot achieve with traditional tools can now be accomplished through the circuitous channels of wealth effects in asset markets or with the competitive edge gained from currency depreciation.

Indeed, economic theory suggests that the interest rate differential should be offset on average by depreciation of the currency with the higher interest rate, the differential thus reflecting the compensation required by investors to hold money in relatively risky currencies.

Dollar depreciation improves Europe s terms of trade and real income.

So we expect a substantial depreciation premium on US interest rates.

The depreciation that followed the crisis helped accelerate recovery by boosting exports.

Of course, now that the renminbi has been accepted into the SDR basket, China must prove that it can manage dramatic currency depreciation effectively and continue to make progress toward internationalization. This will be no easy feat, especially at a time of slowing economic growth.

Simply put, there must be dollar depreciation to keep global imbalances in check.

In principle, such a depreciation against all of the world s currencies is manageable.

A 20 dollar depreciation would therefore reduce Americans purchasing power by only 3 .