As euro strengthens, debate grows about setting a 'target' value

France has floated more intervention, which Germany rejects. The debate is framed by rising concerns over a 'currency war' if countries try to spur economic growth by devaluing their currencies.

|
Kai Pfaffenbach/Reuters
The euro sculpture is pictured outside the headquarters of the European Central Bank (ECB) in Frankfurt, last week.

Finance ministers of the 17-member eurozone failed to find a united front Monday to address concerns over the risks a rising euro poses to the fledging economic recovery, as fears of a global currency war loom.

France, for its part, wants an exchange rate target that the European Central Bank would have to defend. Germany and other northern European countries, however, have played down the idea, and most eurozone countries reject ECB intervention precisely to prevent other global economies from retaliating.

The current chatter over the euro's strength comes in response to rising global concern over artificial currency manipulation, something many accuse Japan and the US of doing. French Finance Minister Pierre Moscovici blamed the euro’s strength on “more aggressive practices by some of our partners.”

At about 1.34 per dollar, the euro remains strong, around 13 percent higher than last July, but still far from the 2011 high of nearly 1.50 per dollar. While its strength may hurt the overall European economic recovery, it particularly affects struggling southern European nations who lack their northern neighbors' dominance in specialized products that are less exposed to competitors. 

ECB President Mario Draghi, last week, effectively sided with Germany’s reluctance to accept France's proposed market intervention, but also suggested the ECB stands ready to react in case other countries manipulate exchange rates.

“The exchange rate is not a policy target. We certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned,” Mr. Draghi said. The ECB will “monitor” the currency’s fluctuations “and their potential impact on the stance of monetary policy, which will remain accommodative.”

The ECB could lower interest rates, for example. A stronger euro means inflation decreases because imports cheapen. By lowering lending rates, liquidity increases and the euro weakens.

Hands tied

Still, the ECB is hamstrung, as it does not have the power to print more money or to buy government bonds to stimulate eurozone economies, as other central banks do. The US and Japanese monetary easing –which injects billions of cash into their economies – devalues their currencies and makes their exports cheaper.

Furthermore, the recent strength of the euro is a consequence of its own success. European private banks paid the ECB back, ahead of schedule, 140 billion euros  they were loaned last year to recapitalize amid the crisis. As a result, the ECB’s balance sheet improved, strengthening the currency. 

“This reflects the improvement in financial market confidence. The appreciation is, in a sense, a sign of return of confidence in the euro,” Draghi said.

The opposite is happening in the US and Japan where the governments are pouring in billions to spur economic growth, hurting the balance sheet, and weakening their currencies.

Countries like Spain and Italy are especially exposed. Government policies have helped to strengthen their export markets, even if not domestic consumption, in one of the few bits of welcome news in an otherwise gloomy economy. A stronger euro could derail prospects of their economic recovery, and that of the EU.  

 Currency wars

Finance ministers of the world’s 20 biggest economies, the G-20, will meet Friday as rhetoric over a currency war heats up. In addition to European criticism of Japan, countries like Brazil criticized recent calls to manipulate currencies.

The G-7, which includes France, Germany, the US, and Japan, is expected to uphold market-determined exchange rates then, and Japan will likely have to defend its economic policies, in an effort to prevent a “currency war.”

What remains uncertain is if the world’s biggest economies can avert resorting to unilateral monetary policies, including in Europe, that reverberate globally and threaten to trigger retaliation.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to As euro strengthens, debate grows about setting a 'target' value
Read this article in
https://www.csmonitor.com/World/Europe/2013/0211/As-euro-strengthens-debate-grows-about-setting-a-target-value
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe