Euro at $1.50 — a disaster or an alibi?

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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