Commission goes less than mid-way on expensive euro

Olli Rehn, the EU Commissioner for the Economy took the floor yesterday, over the euro exchange rate market developments. As he usually does, Rehn wanted on this issue too, to be seen as going mid-way between Berlin and Paris. The question to be answered is of course, if the euro is expensive or not? However he never posed it directly. Asking it plainly would have amounted to raising the issue of the implementation of an exchange rate policy by the European Central Bank. All ECB governors though have repeatedly stated that the central bank does not follow an exchange rate policy, nor it sets euro parity targets. Obviously the Deutsche Bundesbank’s tradition still prevails in Frankfort. And Rehn followed this line, letting the rest of Eurozone down. Let’s see why. Over the past weeks the parity of the euro with the other major currencies has greatly appreciated, more so with the Japanese yen. This development creates a serious drawback for many Eurozone countries, like France, Italy and the other southerners, making their exports outside Eurozone more expensive and their imports cheaper, amidst the ongoing recession.  It’s not the same for the more competitive Eurozone member states like Germany, Holland, Austria and Finland. Those last four countries’ exports are not that much price sensitive, while the expensive euro helps them import cheap raw materials from outside Eurozone. This has been for decades the logic of the Bundesbank. Berlin doesn’t want this to change with the ECB. But what about the rest of Eurozone? The French demands This conjuncture prompted last week the French President Francois Holland to demand the drafting and the implementation of an exchange rate policy by the ECB. Hollande was speaking not only for France but also for the rest of Eurozone countries which are punished by the expensive euro. Berlin didn’t leave the French intervention unanswered. “No, the euro is not overvalued, if the long-term tendencies are taken into account”, said Angela Merkel’s spokesman, Steffen Zaimpert, from Berlin. In short the issue of the exchange rate of the single European money became a prime question, dividing deeply the Eurozone. In such an environment Olli Rehn couldn’t remain silent. Yesterday speaking in an interview to the Austrian magazine “Profit”, he said that there is a need for better coordination of exchange rate policies on the international level, if the global community wants to avoid possible catastrophic repercussions on world trade. He went on recognising the dangers from competitive currency devaluations. He added that, “we have recently warned the Japanese government, in relation to policy measures which lead to the devaluation of the yen”. This was a very open and direct premonition to Tokyo not to continue on the same path. Rehn then stated the obvious by saying, “there have to be reforms on the international monetary system, if we are to avoid negative effects on international trade”. This last statement was like kicking the ball outside the pitch. He could have left a slight opening for a potential application of an exchange rate policy by ECB, if Japan continues on the same way. But he didn’t. Rehn wanted also to answer the German comment that the euro is not expensive. Nor in this front he took the mid-way between Paris and Berlin. He said that “a dearer euro could have negative implications on south Eurozone countries, making their exports outside the single money zone more expensive. On the contrary, Germany, Austria, Holland and Finland would prove more resistant”. In this manner Rehn is just describing the Franco-German confrontation about the foreign value of the euro. Obviously the European Commission wants to be seen as  adopting a position considered to be in the mid-way. In many respects it isn’t. The statement that the expensive euro poses real threats to South Eurozone, is just a statement of the obvious. The proof that Rehn didn’t go all the way to mid-way is that he didn’t make the slightest reference to ECB’s denial to draft an exchange rate policy or set targets for the euro parities. In reality Rehn just wanted to be seen as going mid-way but he actually stopped before that. The issue will develop to a major friction point between France and Germany, if the euro continues to appreciate. The European Sting will be monitoring very closely the issue.