Speech by the French President François Hollande, at the podium of the European Parliament, in the presence of Martin Schulz, President of the EP, seated, on the right, and José Manuel Barroso, in the foreground, on the left. (EC Audiovisual Services).
At last Francois Hollande said it. The French President in a strong statement yesterday said the Eurozone must have an exchange rate policy for the euro. It was high time that Hollande said that, because no other Eurozone leader has the weight to demand such a ground-breaking monetary policy change. So far all European Central Bank governors, including Mario Draghi, have repeatedly stated that the ECB does not apply any exchange rate policy over euro’s parities with the rest of the other major currencies.
The yen and the dollar
Similar statements have being issued lately by all major central bank governors, including Masaaki Shirakawa, the governor of the Bank of Japan. But they don’t mean, Draghi does. In reality Shirakawa is currently under strong pressure by the Tokyo government, to ease the BoJ monetary policies and target more inflation, so as the yen becomes cheaper. This is a clearly targeted exchange rate policy, aiming at increasing the country’s external competitiveness. At the same time tough it risks to start a monetary devaluation domino.
Actually the BoJ head offered yesterday to step down earlier than 8 April, when his mandate expires. Obviously he wants to make room for someone else, who would be less hesitant in planning a cheaper yen. In short Japan’s policy makers are now actively perusing exchange rate policies, without saying it but not being able to hide it either.
As for the Americans and their central bank, the famous Fed prints trillions of dollars and dollar denominated securities, without caring much about the exchange rate. In this respects Beijing is more preoccupied about the foreign value of the American money than Washington, because the Chinese hold more than two and a half trillion in dollar denominated values. In short the Americans print as many dollars as they “need”, also facilitating in this way their policy for a cheap greenback in relation to the Chinese renminbi and the Japanese yen.
The euro
In this front however the ECB follows a quite different path, in the form of Deutsche Bundesbank’s tradition. This last central bank enjoys a unique independence vis-à-vis the government, in order to effectively protect the currency from inflation. To underline the independence of its central bank Germany placed it in Frankfort, away from Berlin’s political establishment.
At the time of the Deutsche mark, the Bundesbank never accommodated the federal government by supporting growth or exports. Low inflation and expensive mark was the only rule. The German theory is that if the products are good, they will be selling all over the world. The monetary support can only be short-lived, creating more problems than it solves.
Not to forget that Germany has suffered a lot of hyperinflation between the two world wars. In any case the austere Bundesbank tradition is injected into the functioning of the ECB. Draghi tries hard to fight it but this is not at all easy. However the Teutonic monetary principles that worked well for the exports of the German engineering industry, do not fit at all the rest of Eurozone countries.
The question is not if Berlin understands that, but how it can be persuaded to accept, that monetary policy should help all Eurozone member states. If the German government insists that the ECB cannot accommodate everybody, then Berlin will open itself to the accusation that is trying to conquer Europe, this time not with tanks, but with the straight jacket of a needlessly expensive euro.
Given all that Hollande had seemingly to be strong on this issue. That is why he voiced so openly his demand for the ECB to have an exchange rate policy. No doubt Paris knows very well that such things are not to be told that clearly. Logically Hollande must have had very good reasons for coming out like that, over such a crucial matter.
Actually the appreciation of the euro over the past weeks has already created strong disadvantages practically for all Eurozone members but Germany. Everybody knows that the German exports are not so price sensitive as for example the tourist industry of France, Italy, Spain, Greece and Portugal. Presumably the French President could not remain silent any more. So he decided to put the problem only hours ahead of the Brussels European Council of 7 and 8 February.
Hollande did not say straightaway he wants a cheaper euro. However this is exactly what everybody in Eurozone wants, except Germany. It is quite interesting to watch now for how long Berlin can resist the pressure of all the others. Even Holland, Austria and Finland, the traditional friends of Berlin, may join the cheaper euro camp. In any case the battle for a less strong euro to accommodate everybody has just started.
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