Is the Rise of the Euro Hurting European Economies?

Photo: Flickr.com/Tax Credits

Photo: Flickr.com/Tax Credits

On Tuesday, February 5 French President Francois Hollande expressed his complaint over an overvalued euro that does not represent the current state of the economy, claiming it is hurting the French.  During his speech Hollande asked the European Parliament to commit to reform of the currency that is currently at $1.35, a 12 percent increase from last summer.

The Germans responded with disagreement.  A spokesperson for Germany said “what we are currently seeing is a rise in the value of the euro which is a counter-reaction to the massive depreciation in the wake of the eurozone crisis.” The European Central Bank’s President, Mario Draghi, echoed Germany’s stance that the “appreciation is a sign of renewed confidence in the euro.”  So the return of the euro’s strength cannot be a bad thing, right?

From Germany’s standpoint, there is no problem.  Hollande’s plea comes from the fact that an overvalued currency exacerbates France’s trade deficit as their competitiveness on the markets becomes threatened.  Louis Gallois, former chief executive of EADS has explained this before: French industrial companies “have ended up in the wrong segment of the global markets.”

But Germany’s industry is concentrated in upscale products where price sensitivity is not a threat to production.  France on the other hand, specializes in Peugeots and Renaults, which are finding it hard to compete with lower-cost producers from emerging economies.

France, Spain, and Greece, all are cutting wages and production to deal with the crisis, but analysts and politicians are worried that this added rise of the euro could undo all of their hard work as exports continue to fall.

Analysts account the euro’s strength from the passing threat of a eurozone breakup, the easing of monetary policies by the U.S., U.K., and Japan, and the rise in interest rates in the eurozone. Morgan Stanley and Société Générale predict that the euro will continue to rise, but by the end of the year it will weaken as the U.S. economy picks up speed again.

Hollande suggested manipulation of the exchange rate as a way to fix the euro’s overvaluation, which is something that the ECB has explicitly said it will not do.  But Hollande mentioned that the rate “does not depend only on the ECB.” Draghi said that the exchange rate is “not a policy target” and that “by and large, both the nominal and real exchange rates are about their long-term averages.”  The ECB and Draghi have tried to pacify the French, assuring that “the effects of things like targeted devaluation tend to be rather short-term. You can’t use it to achieve a lasting boost in competitiveness.”

Nevertheless, economists have warned that the euro should stay between $1.15 and $1.20, and that beyond that range the competitiveness of firms can be jeopardized.  Karine Berger, the national economic secretary in France, added that “if the euro rises to $1.40, all of our industrialization efforts will be ruined.”  Perhaps Hollande’s call to take action against the rising euro has standing, but so far no other government has reiterated or supported his call.

As of the third quarter, the eurozone is falling back into a recession for the first time since 2009.

Trackbacks

  1. […] of French President François Hollande to take action against the strength of the euro brought fears of a “currency war.”  Currency wars are competitive devaluations of currency with the intention of making a country’s […]

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