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France stokes debate on rise of euro

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(Globalpost/GlobalPost)

French President Francois Hollande said on Tuesday that the value of the euro cannot be left to market forces, adding his voice to concerns over the recent sharp rise in the currency.

The euro should not be allowed to "fluctuate depending on the markets' mood," Hollande told the European parliament and the 17-nation eurozone needs "to reflect on the place of our currency in the world."

He said: "A single currency zone must have a foreign exchange policy otherwise it will see an exchange rate imposed on it (by the markets) which is out of line with its real competitive position."

The euro, which has fallen on concerns about the political situations in Spain and Italy, traded at $1.3515, essentially unchanged from its level late on Monday.

French Finance Minister Pierre Moscovici said on Monday that France was concerned about the rise of the euro but would rather seek a dialogue on the issue than "launch an offensive".

He said: "There is no French government strategy to call into question or launch an offensive on the question of foreign currency rates."

On Tuesday, German Economy Minister Phillip Roesler told a press conference in Paris that eurozone countries would do better to strengthen their competitive position than to try to weaken the euro.

"The objective must be to strengthen competitiveness rather than to weaken the currency," he said after talks with Moscovici.

The euro has strengthened sharply as the eurozone appeared to have finally got the better of a debt crisis which at one stage looked as if it might break up the eurozone.

On Friday, the single currency rose to $1.3711, a level last seen in mid-November 2011, stoking concerns that it could hurt exports, a key growth driver for the struggling 17-nation economy.

At Berenberg Bank, senior economist Christian Schulz commented that "rising confidence in the euro and the more conservative policy mix of the ECB compared to its global peers have led to a strong rise of the euro exchange rate.

"While not reaching worrying levels yet, the strong euro has already lowered inflation and may hurt the market prospects of some more price-sensitive exporters."

At Capital Economics, analyst John Higgins said that the euro might well rise to $1.40 by the middle of this year on rising confidence in the eurozone but would probably slip back to $1.25 by the end of the year if the eurozone crisis flared up again.

At UniCredit in London, chief economist Erik Nielsen said at the weekend that the euro was only slightly overvalued and only a couple of percentage points stronger than its average level since 2000.

Nielsen commented that concern about the rise of the euro, including in some quarters in Germany, was less about the level and more about the speed, "and the emerging perception of competitive devaluations by others."

The statutes of the European Central Bank are focused on price stability in the eurozone and based on the theory that monetary policy can have only one benchmark target at a time.

If the benchmark were to become the foreign exchange rate for example, price stability would be undermined.

These principles are also those of the German Bundesbank which, up to the creation of the euro, oversaw price stability in Germany and the consequent strength of the Deutschemark.

German industry learnt to live with this by focusing on efficiency.

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http://www.globalpost.com/dispatch/news/afp/130205/france-stokes-debate-rise-euro