‘Strong euro not a threat’

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Eurozone finance ministers say that there is no need to act on the recent surge of their currency against the US dollar despite French fears that the current situation could dent economic growth.

The euro’s steady rise has been partially fuelled by speculation that the European Central Bank (ECB) will raise interest rates faster than its counterparts in the US and Japan. 

This strong appreciation has led economists and business leaders to speculate that the ECB should call a halt to its cycle of interest-rate increases next year. But ECB President Jean-Claude Trichet has signaled that the bank is poised to raise borrowing costs in December, for the sixth time this year, from 3.25% to 3.50%. 

France’s economy ground to a halt in the third quarter of 2006 after a solid performance in the three previous months; the country is increasingly anxious to act against the appreciation of the euro, which it says is hurting exports. 

A number of economists agree that too strong a euro could slow economic growth in the eurozone by up to 1% next year by lowering the region’s competitiveness. 

They say that the ECB’s monetary tightening will be felt even more strongly in 2007, when the current economic upturn in Europe is likely to lose momentum, due to the global economy’s downturn, high oil prices and strong budget consolidation measures in Germany and Italy (see EURACTIV 25 October 2006). 

French Finance Minister Thierry Breton called for "collective vigilance" now that the euro has surpassed the $1.30 mark. 

French Trade Minister Christine Lagarde agreed that the euro's recent gains had been considerable. She blamed ECB policy for the rise and said the bank should set its policy according to economic growth, not only inflation. 

Ernest-Antoine Seillière, President of UNICE has voiced the same concerns: "The sustainability of this recovery should not be taken for granted and there are risks relating to exchange-rate developments. The ECB should balance these considerations against modest inflation. The ECB should acknowledge, in future, policy decisions that the euro is approaching the pain threshold for EU business." 

OECD Secretary General Angel Gurria has also warned that a stronger euro - against both the US dollar and Asian currencies – could pose certain risks for Europe: "It's a very important challenge in terms of competitiveness and productivity in terms of maintaining its position in international markets," he said. 

But Luxembourg Prime Minister Jean-Claude Juncker, who chairs the eurozone finance minister meetings, insisted that such fears were unfounded: "I don’t think we have to be concerned now…Our present exchange rate has no particular effect requiring our reaction…We are lengths away from the critical zone."

Finance ministers from other eurozone nations agreed with Juncker. Austrian Finance Minister Karl-Heinz Grasser said: "We can live with the current exchange rate," and Italy's Tommaso Padoa-Schioppa confirmed: "The euro has been even stronger in the past." 

EU Economic and Monetary Affairs Commissioner Joaquín Almunia was also optimistic about the eurozone economy, saying that he stuck to forecasts that the region would continue to grow at a steady rate of more than 2% next year. 

On 27 November 2006, finance ministers from the 12 countries that use the euro discussed the surging currency as it hit a 20-month high against the dollar at $1.3178. 

The currency has now risen some 11% on the year, with a jump of 2.8% in the past week alone. 

Although the euro’s strength is good news for importers and transatlantic shoppers, it is beginning to worry EU exporters as their earnings in the US – Europe’s largest trading partner – begin to fall. 

  • 7 December 2006: The ECB's governing council meets. 

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