Italy is masking the intrinsic weakness of the dollar

Since the summer of 2018, the Italian crisis has given rise to fresh concerns over the stability of the euro zone as well as to large capital outflows from the zone. Despite these capital outflows (of equities, bonds and short-term capital), the euro’s exchange rate against the dollar remains close to purchasing power parity (around 1.14 compared with 1.17). That the euro is not weaker against the dollar despite the capital outflows reveals the fundamental intrinsic weakness of the dollar. T he expansionary fiscal policy conducted at full employment in the United States will lead to a sharp increase in the US external deficit, which, in the past, has always led to a sharp depreciation of the dollar.