Just when eurozone economic prospects have turned for the better, a new policy challenge is facing the European Central Bank: an unwelcome appreciation of the euro.
Europe’s single currency has been on a steadily rising trend against the dollar for six months, threatening to stifle growth by hitting export prospects.
The immediate danger might not seem great: recent increases have not taken the euro to last year’s peak of almost $1.60. The worry for the ECB is that the latest rise marks the start of a new phase for the global economy in which the eurozone will bear the brunt of a global adjustment process.
A weaker dollar may help reduce the US’s yawning current account deficit, but it would hit the eurozone at a time when export growth appears to be powering the recovery from recession.
Gilles Moec, European economist at Deutsche Bank, says: “There is a genuine concern within the ECB about the strength of the euro because, more than ever, the eurozone is dependent on overseas demand to gain traction.”
The eurozone has long had a broadly balanced current account. But as the European Commission noted in its latest report on the eurozone: “While the euro area as a whole has not contributed to global imbalances, the resolution of these imbalances could affect it significantly.”
Even without the euro’s rise, growth prospects looked weak. Economists at Unicredit estimate that the 2 per cent appreciation in the euro’s trade-weighted index since July will cut 0.2 percentage points off eurozone growth over two years.
So far European political reaction has been mute. One explanation is that France – where politicians are not slow to complain about a rising currency – has seen one of the region’s best export performances, with car sales boosted by governments’ “cash-for-clunkers” schemes.
But recent trends have moved Jean-Claude Trichet, ECB president, to escalate his verbal interventions. Initially he stressed the US’s publicly stated interest in a strong dollar. Then he warned that “excess volatility and disorderly movements” would have “adverse implications” for economies. At the International Monetary Fund meetings in Istanbul this month, he said that a rebalancing of the global economy “does not at all” imply “a change in the bilateral position of the dollar and the euro”.
Last week, after an ECB meeting in Venice, Mr Trichet went further, saying that authorities “on both sides of the Atlantic” would “co-operate as appropriate”, hinting that heavier-handed action was possible.
In fact, Mr Trichet has stuck largely to quoting from statements agreed by finance ministers and central bank governors from G7 industrial nations, and has refused to comment on possible further steps. Still, Unicredit’s Aurelio Maccario says the ECB president’s rhetoric suggests a “growing dissatisfaction on the euro’s performance”.
What might the ECB do next? In the US, the Treasury takes the lead on exchange rates. In the eurozone, the central bank has a freer hand. Although finance ministers can set guidelines, in practice they have never done so, leaving decisions to the ECB.
But the Frankfurt-based institution knows its limitations. Its record of using verbal intervention is not impressive. In November 2004 and November 2007, Mr Trichet complained of “brutal” exchange rate movements, but the impact on the euro-dollar exchange was short-lived.
More successful was co-ordinated financial intervention in 2000, taken with the US Federal Reserve and other central banks, to support a weak euro. The action marked a turning point in the euro’s fortunes.
Policy on the euro in coming months would probably only work if agreed with the US. But Mr Trichet knows such co-operation is unlikely. Despite public statements from US leaders about a “strong dollar”, the country’s adjustment process is being made easier by the dollar’s weakness. The ECB is finding that the US’s currency is its problem.