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.