Abstract

The recent sovereign debt crisis in the Eurozone, which still continues to grow, is presumed to be one of the most severe financial crisis in the world economy during the past decades. The crisis represents not only a real threat to the recovery of the Eurozone but also to the world economy. Indeed, one of the challenges many European countries are currently confronting with is a trade deficit, which stems from an overvalued Euro. Many empirical studies have shown that an overvalued Euro has led to a current account deficit in many European countries. The neighbor thy policy recently adopted by Japan and the manipulation of Renminbi by China to boost its economy has created more pressures on the Eurozone exports. In order to reverse this trend, adoption of real and financial sector reforms, including devaluation of Euro, seems inevitable. The goal of this paper is to evaluate the impact of devaluation of Euro on Eurozone exports using Keynesian approach, and implementing econometric models. The results of this study suggest that a trivial devaluation in Euro has statistically significant impact on the Eurozone exports, which could reverse the delayed recovery of many peripheral countries.

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