Euro at $1.50 — a disaster or an alibi?

By Paul Taylor
October 20, 2009

OUKTP-UK-FINANCIALThe French can never resist blaming a strong currency for their misfortunes. So it should come as no surprise that Henri Guaino, President Nicolas Sarkozy’s influential political adviser, has said that having the euro at $1.50 is “a disaster for European industry and the economy”. Since the euro stood at just above $1.49 as he spoke on Tuesday, Guaino presumably sees the single currency area as on the edge of the abyss. 

This is manifest nonsense. European exports to the rest of the world, including the dollar zone, were booming in mid-2008 when the euro stood at just short of $1.60. The euro area had a trade surplus with the United States at the time. The steep slide in exports over the last 15 months has been due to a collapse in demand, even though the euro fell as low as $1.25.

A strong currency is not necessarily an economic handicap. West Germany’s export-fuelled post-war economic miracle was built on the foundation of a strong deutschemark.

A strong euro has kept the prices of imported commodities and energy under control and thus helped moderate inflation. That in turn enables the European Central Bank to keep interest rates low, benefiting industry.

Guaino forecast that the European currency’s against strength would become unbearable and Europe would have to react, most likely by printing euros, which would lead to inflation. That too seems improbable. If it were really worried by a strong euro, the European Central Bank could start by cutting interest rates, which are stuck at 1 percent — higher than U.S. or British levels. It could also intervene on currency markets, alone or in concert with other central banks, to buy dollars.

The ECB and other central banks intervened jointly in 2000 to stop the fall of the euro. The action was successful, putting a floor under the European unit. There has been no equivalent joint action in history to try to halt the dollar’s slide. But barring a disorderly dollar rout, which would not be in U.S. interests either, that may not be necessary.

Guaino should ask his countryman Yves-Thibault de Silguy, who was the European Economic and Monetary Affairs Commissioner at the time of the euro’s launch and is now CEO of French construction multinational Vinci. The company does 90 percent of its business in the euro area. So like most other big European corporations, it is relatively little exposed to dollar risk. Vinci has been using the strong euro as an opportunity to buy assets outside Euroland, notably in Britain — not because business is good (it’s lousy) but because assets are cheap and he can buy market share and prepare for future growth.

Of course there are European firms more directly affected by the strong euro, notably EADS, the maker of Airbus plans, which is in direct competition with Boeing. French government are particularly sensitive to currency-induced competitiveness problems at Airbus, but unless it is spectacularly poorly managed, EADS should be hedging its currency risk.

If Guaino is really worried about the over-mighty euro, he should be advising Sarkozy to start cutting France’s record budget deficit and get its burgeoning public debt under control. That would enable the ECB to avoid an early tightening of monetary policy and give European industry more breathing space.


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I’d rather say that the problem is a strong Euro relative to the chinese Yuan rather than a strong Euro relative to the US dollar.

Posted by scaron | Report as abusive

With the Chinese Yuan pegged to the US dollar, Czarcozy is simply playing to domestic political concerns.

Where is the EU going to export to? Combined US ($10 Trillion) and EU ($9 Trillion ) consumer demand is estimated at $19 Trillion. China is estimated at $1.6 Trillion.

A drop in EU and US consumer demand cannot be made up in Chinese imports.

The EU wants a higher US dollar so US products do not push out EU products in the EU marketplace.

Posted by Canucklehead | Report as abusive

The sooner the Chinese pull the peg, the better.

They wont though, until they can pull most of their bonds out, and they’ve cultivated their domestic market enough.

That’s going to be a scary day for the USA and once their currency starts returning to their shores, it will surely hasten its inflationary death spiral.

Europe just has to stay the course.

Comon Europe! Join Australia, Canada, New Zealand!
Hold the course, do it right.
I’m in Australia. If anything, this recession was a speed bump for us. Inflation is the bigger concern than jobs right now. We’re still basically at full employment.

Posted by myne | Report as abusive

As to the last paragraph…
“If Guaino is really worried about the over-mighty euro, he should be advising Sarkozy to start cutting France’s record budget deficit and get its burgeoning public debt under control.”

…I would rather put it as follows:
“If Guaino is really worried about the over-mighty euro, he should be advising Sarkozy to increase France’s budget deficit and its public debt.”

After all, those are factors behind the demise of the US dollar. If they have pushed the value of USD downhill, why cant Europe use the same tactic.

Posted by jjoensuu | Report as abusive

Yep, France should get its budget deficit under control – at 8% odd of PIB its far too high…But its a lot lower than many other countries in the EU, like Spain & Italy – or the UK (whwere the deficit will hit almost 13% of PIB)
And then of course there’s the good’ol USA with a budgetary deifict close to 14% of the entire economy. Og Well, whats good for the goose can’t be good for the ganders too…Countries can remain competitive traders with a strong currency for a time – but not forever. The US is a perfect example of that. And the time its taking to balance their trade deficit despite the plummeting greenback is a pefect example of that.

Posted by Tony | Report as abusive