When the newly created euro slumped to an all-time low in 2000, detractors lined up to predict a dark future for the young currency. The euro marks its ninth birthday on January 1, with detractors now warning of grave consequences on account of its strength.
The single European currency has appreciated by about 14% against the dollar since the start of 2007, surging at one point to within reach of $1,50.
In the past week, however, the dollar has managed to revive somewhat on speculation among investors that in the face of increased inflationary pressure, the United States Federal Reserve will refrain from another cut in interest rates when its policymakers convene on January 31.
A further reduction in US rates would make the dollar even less attractive to investors, weakening it further against the euro.
The euro in late-day trade on Monday was at $1,4405 in London, where the currency market was closed on Tuesday.
Although the euro’s ascent has helped soften the blow of soaring, dollar-denominated oil prices for consumers, it is pinching European exporters by making their products less competitive on international markets.
The aerospace industry, with costs largely in euros but sells outside Europe in dollars, is suffering in particular and threatening to shift some production to dollar zones in order to cope.
”The only way to prepare the company for a dollar that no one can control is — unfortunately — to set up shop in a dollar zone,” Louis Gallois, the chief executive of the EADS European aerospace giant, said recently.
But in the 13-nation eurozone as a whole, there was an unexpected improvement in the trade surplus in October that occurred despite the euro’s strength. The October figure jumped to €6,1-billion ($8,78-billion) from €3,7-billion in September. Analysts had expected an October surplus of just €2,9-billion.
”In the eyes of the public and some politicians the euro is blamed for everything,” economist Patrick Artus said at French bank Natixis. ”At its launch, it was blamed for inflation … today it is blamed for slower economic growth. But the real fault does not lie with the euro but the dollar.”
With the dollar’s weakness fuelled by concerns about the health of the US economy, governments in the eurozone are largely powerless in the face of their currency’s rise.
Although Washington repeatedly stresses that a strong dollar is in US interests, the weakness of the greenback is providing a solid boost to American exports just as the economy is beginning to slow.
But divisions among Europeans about whether the euro’s strength is a problem make it all the more difficult for the eurozone to take action.
French politicians and business leaders have railed against the euro’s strength, while their German, Dutch and Austrian counterparts remain much more relaxed. At the same time, France has seen its trade deficit swell to a record, while Germany has seen its trade surplus keep growing.
However, in a sign of possible change from Berlin, German Finance Minister Peer Steinbrueck, who has stressed in the past that he ”preferred a strong euro to a weak euro”, recently acknowledged that its strength could have a negative impact.
Tensions within the eurozone have grown further on France’s repeated attacks on the European Central Bank (ECB) for keeping interest rates too high in order to fight inflation and boosting the euro’s strength as a knock-on effect.
In an interview with the Financial Times on Monday, ECB President Jean-Claude Trichet vowed to stay focused on fighting inflation and said he would not be distracted by interest rate cuts in the US and Britain.
German Chancellor Angela Merkel has repeatedly rallied to the defence of the Frankfurt-based central bank. The Maastricht Treaty, which created the euro, states clearly that the ECB’s absolute priority is to ensure price stability, meaning containing inflation, and that it must do so independently of any political pressures.
Unable to hammer out a common position on the euro’s strength, the eurozone has focused on China’s state-controlled exchange rate, which Europeans accuse Beijing of keeping artificially low to lift exports.
Concerns about the Chinese currency’s exchange rate have been at the top of the agenda during a recent series of high-level European visits to Beijing, including French President Nicolas Sarkozy and Trichet. — Sapa-AFP