ECB’s Draghi favours a cheaper euro to serve all Eurozone countries

Olli Rehn, Vice-President of the European Commission in charge of Economic and Monetary Affairs and the Euro, (on the left) gave a joint press conference on the meeting of the G20 Ministers for Finance with Mario Draghi, President of the European Central Bank (ECB). (EC Audiovisual Services).

György Matolcsy, the controversial Hungarian politician and economist, currently serving as governor of his country’s central bank, handpicked for the job by the equally controversial Prime Minister Viktor Orban, reported that the President of the European Central Bank, Mario Draghi has set the ceiling for the euro/dollar parity at 1/1.30. This is something Draghi has repeatedly denied by saying that the ECB doesn’t set target parities for the euro in relation to other major currencies. Yesterday the euro was traded for 136 American cents.

Matolcsy, speaking yesterday at a financial conference, insisted that Draghi more than once has expressed his views over the euro/dollar parity in the regular meetings of central bankers in Basel. According to the ultra-conservative Hungarian politician and economist, Draghi has explained that the south Eurozone countries need a euro/dollar parity around 1/1.1 in order to be competitive. It’s not clear if France is categorised in this group by Draghi.

Cheaper euro

Many French decision makers though have blamed the expensive euro for their country’s economic problems. The French minister of Industrial Renewal, Will Arnaud Montebourg, ‘l’anfant terrible’ of the Paris government has gone very far in this way. Speaking in the Paris daily, Le Parisien last month said, “the euro is too expensive, too strong and a little too German”. He demanded that the ECB should do what every central bank does in cases like that, “Adjust the rate in our interest.”

Matolcsy went on reporting that Draghi in Basel told his fellow central bankers that above the 1/1.1 euro/dollar parity the south Eurozone countries are losing ground in international markets and at 1/1.3 their competitiveness is critically harmed. Always according to the Hungarian central banker, Draghi said that a parity of 1/1.6 can be tolerated only by Germany. The same source says that the ECB has drafted a study supporting Draghi’s opinion about the euro/dollar parities. Understandably the report will be published soon.

A delicate issue

The euro/dollar parity however is not a unilateral decision. The Hungarian economist, turned politician, turned central banker suggested that the ECB should set its inflation target above the present 2% and up to 4% and start printing money. He forgets however that what can be easily done in Prague with the Czech koruna becomes a huge European and global issue in Frankfurt on Main. The ECB has to cater for 17 soon 18 countries and the parity of the euro with the other major currencies is a quite complex affair.

In the face of it the ECB doesn’t set parity targets. Even if it did it would have been very difficult to achieve them. It’s one thing to set parity targets and another thing to start printing money. Not to forget that Eurozone has an overall positive primary fiscal account and tens of billions of surpluses in the trade balance of goods and services. This is the solid base of the increasing foreign value of the euro. It will take a lot of action to reduce it. For example the latest ECB basic interest rate reduction by ¼ of a percentage unit had almost no effect on the euro parities.

Germany has to reconsider

It’s also true though that Eurozone has to pay for its huge needs of imported energy and other commodities. This is particularly true for Germany. Not to forget that this country lacks the French nuclear capacity and the agricultural production dynamic. In many respects a strong euro has competitive advantages for Germany. Berlin’s close ties with Moscow are better served by a strong euro. It favours the German investments in Russia and its imports of energy.

However the foreign value of the euro cannot serve only Germany. There has to be a trade-off between the needs of Berlin and the survival of the rest of Eurozone. And this can be realised at a much lower level than the current 1/1.36 of the euro/dollar exchange rate.