German industry finally joins Europeans in concern over strong Euro

Ten days ago still, the German Finance Minister Peer Steinbrück stood in strong opposition to several of his Eurozone partners: during a meeting of the Eurogroup, some countries had raised strong concerns over the appreciation of the Euro, backed by their industry. The German government took a relaxed position on this matter, arguing both that the German industry had no export problems due to their succesful efforts to improve productivity, and that the strong Euro also had economic advantages, notably due to the low prices this brought about for imports, e.g. energy.

Steinbrück recently declared he “loved” the strong Euro. Signals are there that this affective relationship may change in not too long a time, with the Euro breaking a new record high against the US-Dollar.

Competitive as it may be, the German industry federation yesterday joined their European, French and Italian counterparts in a letter to Jean-Claude Juncker, Eurogroup President, and their respective national finance ministers.

Just before the G7 summit, they urged them to engage for an orderly adjustment of exchange rates and current account balances, stating their concern over rapid exchange rate movements the world has recently witnessed.

This statement will make it increasingly difficult for the government of the largest state and national economy in the Eurozone, Germany, to try to hush any debate on exchange rate policy for the Eurozone or global macro-economic cooperation. In the German press, there was not or hardly any reaction to the joint industry federation statement. Quite differently though in Italy, where the economic daily Il sole 24 ore, Corriere della sera and other papers discussed the matter in today’s editions. If the euro persists at its current level (or rises further what is more likely) the debate will intensify in Germany, too.

This is good news as important time has already been lost. Rather than engaging in this debate seriously and confidentially, the public disputes of the EMU-13 countries on this matter (e.g. in the context of the latest Eurogroup meeting) show that some Finance Ministers seem to grant more importance to their own public statements, than they do to raising confidence in the markets that they know what they are doing.

The industry is right not only to state their vested interests: More importantly: their European statement shows that they share an analysis of the problems and risks inherent in the current situation, and that they have the legitimate interest that the Eurozone governance acts together and in one sense. The G7 meeting today is the right occassion for the political leaders to show that thew have also understood the challenge they are facing.

This post is co-posted on Eurozone Watch.

4 Responses to "German industry finally joins Europeans in concern over strong Euro"

  1. Guest   October 19, 2007 at 4:55 pm

    Good to worry about a strong Euro. But how to weaken the Euro? Sterilized forex intervention would not work. The only solution is for the ECB to ease rates. But when will it do that? And anyhow it looks like the Fed will ease faster and more than the ECB? So what can stop euro’s upward move?

  2. Guest   October 19, 2007 at 4:56 pm

    Would a faster RMB appreciation lead to a stronger euro/dollar rate or a weaker euro? The effect is ambiguous. Should Europe worry about the dollar or rather about the weakness of the RMB that has fallen in value relative to the euro this year?

  3. Guest   October 19, 2007 at 5:04 pm

    “Rather than engaging in this debate seriously and confidentially”… what is there to be confidential about? Why this ‘holy grail’ attitude towards exchange rate policy?

  4. Alessandro   October 20, 2007 at 5:30 pm

    @Guest on 2007-10-19 16:56:53

    A faster RMB appreciation without real free float will still leave China with plenty of dollars to invest.

    On the other hand holding dollar assets as the RMB goes up faster is even more painful as it already is today, so China might choose to overweight other currencies in its reserve portfolio, euro being a natural choice.

    In this scenario, that might actually already be in place since august judging from the reported flight out of US debt, China sells dollars to buy euros.