NPR logo Bailout, Schmailout: The Euro's Still Falling

Bailout, Schmailout: The Euro's Still Falling

The promise of a trillion-dollar bailout for Europe was enough to calm bond investors this week. The European Central Bank stepping in to buy sovereign debt helped, too.

But the value of the euro kept falling, and it hit an 18-month low today as it fell below $1.25. The decline suggests investors think the economic outlook for the euro-zone is bleak.

In order to get the debt situation under control, several countries in Southern Europe will have to both raise taxes and cut spending, even as their economies remain weak. This is essentially an anti-stimulus program that's likely to prevent the region from returning to strong economic growth anytime soon.

There are a bunch of reasons why currency fluctuations reflect economic outlook. When an economy is doing well, exports, foreign investment and interest rates all tend to be higher, and all of those things drive up the value of a currency.

Still, there is a silver lining here. A falling currency can make it easier for countries to climb out of the hole. Among other things, it makes exports cheaper, which helps drive economic growth.