Sunday, May 11, 2003

Euro Rise: Not Significant,...........But a Problem For Business?

This is Pedro Solbes' appreciation of the situation as the common currency seems to continue its upward climb without restraint. As I indicated yesterday, probably the main legacy of the war is that no-one would believe the ECB had the capacity to stop the dollar's fall if that fall were being pushed by a deflation consciouss US government. So maybe the best policy they can see is put up and shut up. The question is one of credibility, and right now Brussels and Frankfurt have very little indeed. Even so, what is a problem for business today will reach the rest of us tomorrow. It's the complete bankruptcy of the thing that gets to me. While everyone is busy congratulating the Fed on seeing the danger coming, on 'letting us in on the conversation', on preparing the 'unconventional tools', the ECB is still in denial: we are still talking about a further reduction in inflation being beneficial and liable to promote growth. It seems that the time the ECB spokesmen don't use excelling themselves Byzantime obscurantism, they seem to idle away testing the limits of absolute folly.

I am not, in principle, convinced as to the workability of the euro. But if I was, then I would be looking to see a serious effort made to make it work. This would involve a real call to arms from the Central Bank and the Commission. It would involve an open recognition that the flagship, the titanic of the fleet, was in danger, and that its was hands-on-the-pumps time all round. This is the time to show that level of mutual solidarity that is considered so necessary to make the euro work. The smaller, peripheral economies need to be prepared for sacrifices (or did they think it was all about drawing down money from the structural funds?). Maybe near zero interest rates would provoke dangerous inflation in Spain, Greece and Portugal, but if Germany sinks into the deflation mire, and the 'unconventional tools' come out, the damage is going to be far, far worse. Or are we not prepared to think about the unthinkable?

The euro hit a record high against the yen in Asian trade on Friday as its appeal as a yield earner, after the ECB kept eurozone interest rates on hold, gathered momentum. The single currency rose as high as Y135.26 against the yen, after closing at Y133.57 over night in New York.In early European trade the single currency was at Y134.83. Against the dollar the single currency hit a new four-year high of $1.1537 before falling back to stand at $1.1505 after closing at $1.1451 in New York on Thursday. Gains for the euro were, in part, fuelled by comments after the European Central Bank's rate decision by governor Wim Duisenberg. Mr Duisenberg said that the ECB was not alarmed and that current levels were not excessive.Pedro Solbes, the EU's monetary affairs commissioner, echoed Mr Duisenberg's comments overnight, saying that the level of the euro was not significant. He voiced concerns however, that the currency's rapid rise was a problem for businesses.
Source: Financial Times

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