EU leaders warn euro strength could stifle growth

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The euro’s strength is harming the economy of the 15 countries using the currency and could exacerbate an anticipated slowdown in the bloc’s economic growth in the year to come, EU officials cautioned.

Speaking on the sidelines of official celebrations marking Malta’s 1 January entry into the eurozone, France’s European Affairs Minister Jean-Pierre Jouyet stressed: “We cannot live with a euro at this level,” adding: “The problem is the speed of this appreciation, and the fact that the three other major currencies are too weak, the yuan, the yen and the dollar.” 

“Of course it’s a concern, everybody is concerned,” Italian Prime Minister Romano Prodi agreed. 

The euro gained 15% against the dollar in 2007, making it harder for the region’s exporters to compete globally, and raising fears regarding the bloc’s ability to cope with the predicted economic slowdown triggered by the credit squeeze in the United States. 

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, admitted that the growth forecasts for the eurozone in 2008 were likely to be cut down from 2.2% to just 1.8%. 

But European Commission President José Manuel Barroso staved off allegations that the euro has become too strong. “The success of the euro reflects the confidence in the European economy; the European economy has come back and the euro reflects that,” he said, adding: “Look at Germany, which is booming in export terms and is exporting to countries which don’t have euros.” 

EU Monetary Affairs Commissioner Joaquín Almunia nevertheless conceded that “the present exchange rate of the euro in effective terms is close to historical limits” and that “we need to be very vigilant, and transmit to our partners how we seek to resolve global imbalances in a cooperative way.” It is important not to have “increased volatility and problems for everybody with a disorderly unwinding of these imbalances,” he added. 

It is expected that EU nations will seek action to correct the imbalances between the different major currencies at a meeting of the Group of Seven industrialised nations in Tokyo next month – focusing most notably on the Chinese yuan, which Europeans claim is purposefully undervalued by as much as 20-25%, giving China an unfair trade advantage (EURACTIV 26/11/07). 

In the meantime, the euro’s strength could start posing problems closer to home, as the British pound continues its rapid depreciation after having fallen by nearly 9% against the euro since November 2007. 

Indeed, although Europe’s attention has focused mainly on the dollar’s weakness, the eurozone in fact exports more to the UK than it does to the US, meaning that the pound’s fall could severely add to the dent in the bloc’s earnings. 

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