It’s hard to read the tea leaves of the European Union at such a remove, but a public show of disagreement, even if done politely, is not an everyday spectacle.
Frances’ finance minister Christine Lagarde urged central bankers to alleviate currency misalignment. This is mainly code for “do something about the pricey euro” but is also a shot at the US for debasing its currency and the Chinese (among others) for maintaining currency pegs to the dollar. Her rationale is legitimate: continued valuations at these levels are feeding protectionist sentiment in the US and the EU.
Now of course, the most immediate response would be for the ECB to lower interest rates. However, the central bank has signaled its intent to adhere to its inflation targets, which means holding the line on rates.
I had assumed the ECB would relent, since I keep hearing that European banks are not in great shape. However, a hedge fund correspondent who had just come back from Paris told me that he did not expect rate relief, since Europeans, having experienced hyperinflation, are much less willing to take chances with rising prices than the US is.
Another simmering issue is that the EU has yet to go through tough economic times. Maintaining one monetary/interest rate policy across such diverse economies is tricky business. Worse, Germany so far has handled its banking problems internally, while Spanish banks have made heavy use of ECB repo facilities when their mortgage securitization market shut down. The notion that some countries get more benefit from the ECB than others may capture the public’s imagination if ECB-imposed policies are seen as hurting some members more than others.
Of course, while Lagarde was speaking primarily for the benefit of Europeans, one can only hope that the Fed took notice.
From the New York Times:
France’s finance minister on Wednesday urged central bankers to reduce the “misalignment” in the world’s major currencies, warning that a low American dollar was feeding an increasing trend toward protectionism in the United States and elsewhere.
The minister, Christine Lagarde, said the dollar’s decline was a central cause for the rising cost of oil, which is priced in American dollars. On Wednesday, the price of a barrel of crude oil settled at another record, $133.17.
Anxiety about high energy costs, unbalanced currencies and slowing growth causes politicians to re-examine their domestic economies, Ms. Lagarde said. “Protectionism is trendy at the moment,” she said in an interview. “We need to turn that risk of extreme protectionism into something positive, and I think regulators, governments and international organizations have a responsibility to offer an alternative path that includes more regulation and policy coordination.”…
Ms. Lagarde said the euro’s surge against the dollar and the Chinese yuan was “not helpful — it’s a major misalignment.”
“A rebalancing of currencies would be good for all economies,” she added….
France has lobbied for lower interest rates among countries using the euro and has suggested that the European Central Bank broaden its mandate to include bolstering economic growth, beyond its goal of controlling inflation. While Ms. Lagarde said that the bank’s president, Jean-Claude Trichet, was right to be concerned about inflation, she said he was “overly focused” on it.
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France’s finance minister is Christine Lagarde. Lagardère is the boss of Airbus’ holding company (I’m sure he would approve a rate cut, too…)
gu si fang,
Thanks. How embarrassing. This isn’t the first time I’ve repeatedly misspelled a name. Have corrected the post.
This is the dismal history of central banks. They are ostensibly independent entities.
Independent, that is, until it becomes politically inconvenient, and their mandate is modified to suit political whim of the moment.
The ECB, such as it is, is superior to the Fed in its mandate. Unlike the Fed, the ECB’s mandate isn’t manifestly contradictory.
However the clarity of their mandate is soon to be muddied by the political desires of some weak-kneed Euro-politicians.
You might want to read this analysis.
http://macro-man.blogspot.com/2008/04/what-is-ecb-smoking.html
I think Macro Man nailed it when he said the ECB is not cutting rates any time soon. He’s been a bit skittish on his prediction after that but last week’s economic data from France (Q1 growth 0.6%) and Germany (Q1 a whopping 1.2% + plus record exports despite the strong Euro) combined with EMU inflation down only a little to 3.3% (target is 2%) pretty much confirms MM is correct in his assessment. Spain will just have to suffer the pain and Mme Christine Lagarde will get a polite brush-off once again (yes, she tries to pressure the ECB regularly, nothing extraordinary about it).
We badly need a coordinated realignment of major currencies. This takes political will, and political authorities with credibility. In the US, our political authorities have negative credibility, and we won’t have a servicable replacement for nine months or so; one could have a child faster. Maybe the problem will wait that long; we should be so lucky. In the Eurozone, political authorities aren’t on the same page, even if the financial authority—the ECB—has he kind of will to negotiate a solution that will stick. Who holds the political authority in China is rather diffuse, but what is certain is that parties sent to negotiate will not have authority to commit.
So you all tell me: who can or will take the initiative to coordinate a solution? Right now, we just have high-level heads talking to the press, which is the opposite of a solution. “Paging Msr. Trichet. Your mission, should you choose to accept it . . . .” *dah-dah-dahh da-DAAHHH-dah, [fadeout to sponsor]*
Lagard has been saying the same thing since she took up office about a year ago. She’s probably lost more ground in that time than gained it, even in her own country, because the current no. 1 concern in France is spending power, i.e. inflation, and not unemployment or growth. The ECB is doing a good job. They’re the grown-ups.
I wish Lagarde could get the ear of the Fed. My assumption is she is trying to get any actor she can to take the need for currency realignment seriously, and Trichet at least has to respond to her in the press. But I agree completely, the ECB is handling this far better than our Fed.
“My assumption is she is trying to get any actor she can to take the need for currency realignment seriously…”
She’s all for currency realignment EUR vs Asian currencies. But she’s against it EUR vs USD, because that would make a strong Eur (vs Usd) permanent. Basically, she wants a weak or weaker euro.
I recognized she wants a stronger dollar. Our protectionist sentiments have to do mainly with China and India. Polls say Americans are unhappy about the weak dollar. So having the dollar rise versus the euro would be non-controversial to positive (as far as the vast majority is concerned).
Sorry, didn’t understand what you meant by “currency realignment.”
Anyway, I don’t agree with Lagarde. The Euro should stay strong against the Dollar, because the Dollar is a weak currency from a declining country run by a corrupt oligarchy who think that solutions to serious economic problems is to use Enron-type operations to make it seem that the problems don’t exist.
There’s no inherent good in a strong currency (except insofar it mitigates inflation). Besides, if it was just America then fine from the EU’s point of view, US industry is so run into the ground that it will take years of investment before the trade gap can be closed. Unfortunately a lot of other countries are pegged to the dollar (including that big exporter China). For now a strong Euro isn’t hurting but in the long run…
Moving on to something else. I think the ECB inaction on the rate front can in some part be ascribed to different dynamics between an integrated American market and a European currency union with financial sectors still by and large split along national lines. Risk in Europe is compartmentalized so to speak. If ECB credit fails to prop up Spanish banks, then the problem ends up in the lap of Spanish authorities. It’s not a big problem for other European countries.
Improperly set rates on the other hand… that affects the whole currency union. Looking at the economic figures the EU seems to be chugging along adequately so if inflation persists above 3% then the ECB could pull a rabbit out of the hat and actually raise rates.
“There’s no inherent good in a strong currency…” Sure there is, when your savings is in that currency.
Okay, I’ll let the subject go…!
The malignancy in the system is China (and other peggers) coupled ewith the enabling policies pursued by the develped crowd for decades. The US doesn’t have the stomach to make the necessary changes. Rodrik strikes exactly the right balance.