History tells a rather different story. Successful economies have typically experienced appreciating exchange rates during periods of their most rapid development; and the wealthiest economies tend to be those which appear to be the most expensive in terms of overall price comparisons. It is not so much the real exchange rate which determines prosperity, as it is the fundamental characteristics of the economy, such as underlying productivity, which determine the real exchange rate. An economy which can successfully sell high value-added goods and services on world markets and as a result enjoy at the same time relatively cheap imports is better off than one which balances its accounts by selling a higher quantity of cheaper output and buying a lower quantity of dearer imports. There remains a question of whether there might nevertheless be advantage in a short burst of competitive advantage - as might be delivered by an engineered depreciation before the inflationary feedback negated the competitive gains - not just as a means of boosting the economy in the short term but also hopefully as a means of building a better foundation for longer-term growth. Experience suggests, however, that this sort of procedure is a bit like a drug to which the patient too readily becomes addicted. If people come to expect continuing doses of devaluation, then inflation and inflationary expectations may harden and, perhaps more significantly, businesses are spared the discipline of searching for greater efficiency or the incentive to move up-market.
1  Helmut Schmidt; Remarks at the Farewell event for the ECB President Jean-Claude Trichet; October 19, 2011. BIS central bankers’ speeches  1  But since then, the Eurosystem has struggled to match this performance. Inflation has been well below 2% for 3 years now – with exactly the same phenomenon in Germany itself – and this fall cannot be explained completely by the decline in oil prices. At the same time, inflation expectations have gradually drifted down over the last three years. Our mandate imposes a duty to react, in order to protect the Eurozone economy – including the German one – from the lethal danger of deflation. Third, patience within a medium to long-term perspective. In this volatile world we live in, our policy reactions are not the result of short-term economic fluctuations, market overreactions, media headlines or poll results. Our credibility is also symmetric. If we tolerate long deviations of inflation under 2% now, there is a risk that in the future, when inflation wanders above 2%, our determination to bring it back to close to but below 2% lacks credibility. As Romer and Romer, two US monetary economists, forcefully argued in a recent paper 2, the most dangerous idea for central bankers is to indulge in the idea that monetary policy can do little against shifts in the output gap, be they negative or positive. In retrospect, there is sound evidence now that the Great Depression in the 30’s and the Great Inflation of the 70’s were sustained by this belief.