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By Bloomberg

Euro-area stagnation poses the largest threat to the global economy and Mario Draghi should weaken the euro to help boost the flagging economies of France and Italy, according to former Bank of England Governor Mervyn King.

“The euro area is the biggest risk because I don’t think the leaders in the euro area actually have a true vision of how to cope with the problem,” King said in an interview yesterday with Bloomberg Television’s Olivia Sterns in Naples, Florida. “Many are trying to put in place structural reforms, but that is not going to be sufficient to generate a recovery. They also need to have macroeconomic stimulus.”

The euro area’s recovery has been in peril since economic malaise transferred from once crisis-stricken periphery nations to countries in the region’s core. Data last week showed that while Germany and France, the currency bloc’s two largest economies, returned to growth in the third quarter, Italy remained a weak spot, shrinking for a second quarter.

The euro has fallen from a 2 1/2-year high in May after European Central Bank President Draghi unveiled a medley of stimulus measures and signaled a desire to grow the institution’s balance sheet by as much 1 trillion euros ($1.25 trillion). The currency fell versus most of its 31 major peers yesterday after he said stimulus to lift the region’s “abysmal” performance may include buying government bonds. It was trading at $1.2520 as of 10:08 a.m. London time, up 0.6 percent on the day.

Diverging Policy

While Draghi says the exchange rate isn’t a policy target, a depreciation increases the cost of imports and boost exporters’ competitiveness, which would aid efforts to revive inflation that’s close to the weakest since 2009. Draghi has said the devaluation reflects a divergence between Federal Reserve and ECB policy.

“Despite the success in reducing sovereign bond yields, which helped the periphery countries, the side effect of that was probably to push up the euro a little and that’s done damage to France and Italy,” said King, now a professor at the New York University Stern School of Business. “The challenge for the ECB now is to find a stance of monetary policy that would allow the euro to weaken sufficiently to give France and Italy a chance to start see a recovery in growth.”

Such remarks evoke language used in competitive devaluations, or “currency wars,” a term popularized by Brazil Finance Minister Guido Mantega in 2010 to describe using the exchange rate to boost growth. King said such policies may increase strains in the global economy over the next year.

“Given monetary policy is as easy as it is, then policies now designed to push the exchange rate down will look to other countries rather like currency wars and I think this is an area of potential tension in the next 12 months,” King said. “We will need big changes in exchange rates I think over the next few years, but it’s very important they’re not done as a means of trying to get whatever demand there is in the world into your hands rather than someone else’s.”