You are in:
- Archives » 2008 » April 2008
High Euro Brings Problems
The daily diet of misery that is the Independent is wetting its organic cotton knickers today at news of pound sterling's plunge in value against the euro. The euro, the newspaper gushes, "has powered ahead on the strength of its member economies", and its surge "may spur new theories from economists that the currency of the eurozone will become the main international unit of currency as early as 2015, upsetting almost the best part of a century of dominance of the dollar."
This being the Independent, delight in the euro's muscle is tempered with grim reading for British holidaymakers, who will feel particularly impoverished should they visit the eurozone over the next few months (Americans are already staying away).
Hooray for the euro, then, much-derided by overseas commentators when it plummeted just days after its launch, it's now approaching parity with the pound and making the dollar look like funny money. It cannot have escaped the europhile Indie's notice that, as Guido remarks, eurosceptics have long feared parity with the pound, as it would make Britain joining the single currency much easier. Why stick with the creaky pound when the sunny soaraway euro is reaching new heights of glory?
Well, just ask the French and Italians.
French President Nicolas Sarkozy's complaints about the strength of the euro date back to his period as finance minister. As the euro gathered strength, French manufacturing, exports and tourism have suffered. Sarkozy has made regular calls for the European Central Bank (ECB) to use interest rates to influence the euro exchange rate; the most recent on March 27, when he addressed French business leaders in London.
Sarkozy isn't alone in this respect. In 2006, then PM Dominique de Villepin called for power to be wrested from the ECB: "We must clarify matters in exchange rate matters," he said, "which means taking back our sovereignty."
Nor were complaints limited to the centre-right. The Socialist Presidential contender Ségolène Royal echoed de Villepin, saying "It's not for the (ECB President) to dictate the future of our economies; it's a matter for our leaders chosen by the people. We must completely change the charter of the central bank."
On Tuesday, Silvio Berlusconi, favourite to win the coming weekend's Italian election, promised to intervene with the ECB to tackle the unacceptably high exchange rate. Italy is even more dependent on exports than France, and its economy, like many others in the eurozone, could hardly be described as "strong". Berlusconi has previously described the euro as "a disaster" for Italy - Italian governments have traditionally devalued their currency to boost exports through difficult times; that option no longer exists.
There is strong feeling against the surging euro in the Italian business community. In October Germany's finance minister said he liked the euro to be strong; Italy's business paper Il Sole called the remarks "a declaration of war."
Rising prices and pressure to make counter-inflationary cuts have left citizens feeling short-changed; while in the international context, producing goods in France and Italy has become prohibitively expensive for manufacturers, who are keen to move their production overseas. Add to this the strength of the euro, which puts already pricey goods out of the reach of export markets and you have a "perfect storm" which could cause untold damage to the European manufacturing sector.
Other influential voices have echoed Sarkozy and Berlusconi's concerns.
Spain's property boom - among Europe's biggest - has turned to a slump, and Spanish economists have grumbled that the government can no longer lower rates to give the market a push.
The European Commission said at the end of March that "the 15 countries sharing the euro were beginning to "feel the pinch" of turmoil in international markets, weak US growth and record commodity prices."
This follows an unprecedented collective warning from the leaders of the EU's 27 nations about the rise of the euro. Following a two-day summit in March, the leaders added a hasty conclusion to their summing up which stated:
"Excessive volatility and disorderly movements in exchange rates are undesirable for economic growth."
"In the present circumstances we are concerned about excessive exchange rate moves."
Luxembourg's Prime Minister Jean-Claude Juncker called the statement "unprecedented" - heads of government traditionally steer clear of making comments on the exchange rate in order to respect the independence of the ECB.
The European Central Bank's only job is to control inflation, argues its boss, Frenchman Jean-Claude Trichet. Trichet's post may not be political, but his appointment was. The French demanded one of their men got the appointment, partly to balance the fact that the ECB's philosophy emulated the Bundesbank's fetish of a strong Deutschmark. It has proved to be little more than a prestige appointment for France, however; any hopes that Trichet might exercise influence on the ECB to help his own country out have been disappointed, as the Frenchman has been studiously independent while in the job.
ECB board members have continually argued Trichet's line. Lorenzo Bini Smaghi said in March that unlike the US Federal Reserve, the European bank's remit did not extend to creating growth, despite Sarkozy's demands. He added that eurozone exports were holding up well (though Eurostat showed that exports slowed significantly in the fourth quarter of 2007, from 2.1 percent in the previous three months to 0.5 percent).
The ECB meets again today, and doubtless a cut in exchange rates will be raised, and most likely dismissed. Inflation remains near a record high and the bank continues to stress that exports and deamnd are healthy. Moreover, northern nations like Germany and Holland aren't feeling the squeeze to the same extent as their southern brethren. Analysts think one will come this year, perhaps in the fourth quarter, but Latin countries believe this could be too little, too late.
Rather than send Britain rushing into the arms of the European Central Bank, the current crisis is likely to encourage Brits to continue to keep their distance from the euro, more expensive holidays or not. However, it isn't likely to lead to the break up of the eurozone, as some commentators argue.
Israeli financier Avi Tiomkin wrote in Forbes that contradictory pressures would destroy the single currency within three years. His article enjoyed a predictable response in the anti-European reaches of the US blogosphere (as well as among fanatically pro-euro blogs). A europhile might argue that the euro can't win with these guys, who gloated when the single currency was born a runtish weakling and gloat still, now that the euro has been reading up on Charles Atlas and is kicking sand in the dollar's eyes.
Italy is generally identified as the most likely candidate to jump the eurozone. Complaints about the currency among voters are common and it remains the only nation in the single currency region where the pre-euro currency has been "reintroduced", albeit in a gimmicky way. Plus, its economy is seen as more vulnerable than that of France or even Spain. In France, however, voters recently rejected the European Constitution: Plus, with politicians as prominent as de Villepin and Royal calling for fundamental change in the ECB's charter, it is the only large nation where such demands are the stuff of mainstream politics (and are, by and large, supported by the public). France carries more political clout within the EU than Italy, but its elite is europhile - the smart money would be on France pushing harder for wide-ranging reform of the ECB, rather than breaking up the single currency.
Who knows, they might even get it - and as was pointed out a couple of years ago, the price could be greater integration. Federalists always call for more integration when a crisis looms, and what greater crisis than the break-up of the euro currency zone?
Back in 2006 when Royal and de Villepin were making their demands, the euro was high but "not in uncharted waters", as one ECB official put it. Its rise above 1.40 dollars at the turn of the year was described as a "painful threshold" by European businesses; today it stands at 1.58 dollars - well beyond the pain barrier for exporters and tourism. Something has to give - we're betting it won't be the single currency.
