After British, Japanese, and American nail-biting about where their currencies are headed, eurozone leaders are the latest to join in the jeremiads. With the euro touching $1.50, an adviser to the French president, Nicolas Sarkozy, has called the euro’s strength a “disaster” for Europe’s industry.
European whining is more startling than hand-wringing elsewhere. The young currency has after all taken more than its a fair share of bullying as a weakling in the major currency club. From being worth $1.18 at its triumphant launch in 1999, it hit an embarrassing $0.83 less thant two years later, a fall of 30 per cent. It fell by an equally humiliating 20 and 33 per cent against sterling and the yen.
So one might have expected a celebration of the increased purchasing power the once-maligned euro is now putting in the pockets of consumers. That its strength reflects the weakness of the dollar and the pound – up respectively 19 and 29 per cent on its launch rate, it is merely back where it started against the yen – is a vindication of sorts of continental Europe’s economic model against American and British romance with finance.
Leaders worry about the pain borne by exporters. But the significance of that pain should not be overstated – half of eurozone members’ foreign trade is with other member countries, unaffected by the currency’s external strength.
A very good thing, too: a strong common currency is better than none at all. Before, dollar strength would set off currency chaos by creating incentives for beggar-thy-neighbour attempts at weakening national currencies. Not only was this self-defeating; it also softened exporters’ market discipline, since relying on policy action became easier than raising productivity.
Euro appreciation against dollar and sterling also makes the eurozone help rebalance the world economy, which its major members, through their role in the G20, claim to support. The eurozone, though close to balance with its small current account deficit, must take care not to swing into surplus as its more profligate members tighten their belts. In fact it would do the world a lot of good to increase the eurozone deficit as the US and UK move towards surplus.
Monetary policy is not without part in the rise. Despite low interest rates, a steep rise in portfolio flows into eurozone money markets shows investors find the carry trade attractive. Still, European Central Bank president Jean-Claude Trichet is right to focus on exchange rate volatility, not absolute strength, as the main concern.
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