Euro ministers fall short of pressing dollar, target RMB

“We affirm that exchange rate should reflect economic fundamentals and that excess volatility and disorderly movements in exchange rates are undesirable for economic growth,” the eurozone finance ministers said in a statement after a meeting here on Monday, which only repeated their previous words.

The ministers were attempting to find a common line for the euro zone in the upcoming meeting of the G-7 leading industrialized countries in Washington next week. Ahead of the meeting, Luxembourg’s Prime Minister Jean-Claude Juncker, who heads the eurogroup of finance ministers, said the eurozone would “without a doubt” step up pressure on finance chiefs from the G-7 partners as the euro hovered around its all- time high against the US dollar recently. The euro weakened but remained at its record level against the dollar earlier on Monday on speculation of the outcome of the eurozone finance ministers meeting. It peaked at a historical high of €1.4284 last Monday, driven by continued concerns about the massive US trade and budget deficits, and speculation of new US interest rate cuts.

Some eurozone countries, led by France and Italy, stepped up their calls for depreciation, complaining their exports are suffering and economies are getting hurt. They had hoped to send a stronger message to other partners, especially the United States, to curb the appreciation of the euro, which was virtually a reflection of the continuous weakening of the dollar. However, in presenting their common position for the G-7 meeting, the finance ministers only agreed to say “we have noted with great attention that the US authorities have reaffirmed that a strong dollar is in the interest of the US economy.” The tone was obviously much softer than expected. “We had a lengthy debate,” Juncker told reporters after the meeting which dragged into deep night of Monday due to the sharp difference among member states.

Despite France’s call, Germany, the biggest economy in the euro zone and also a G-7 member, has been in support for a strong euro. “I prefer a strong euro,” German Finance Minister Peer Steinbrueck told reporters on arrival for the meeting with his eurozone counterparts, making clear his difference with France and Italy. The Netherlands and Austria took a similar line with Germany. Dutch Finance Minister Wouter Bos said “the whole idea of the strong euro means that people have confidence” in the economy and Austria’s Wilhelm Molterer said “the ECB has our full support.”

Instead, the finance ministers unexpectedly singled out China as an easy target, pressing the emerging economy to do more to make its currency RMB more flexible. “In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur,” they said. Juncker said he and President of the European Central Bank Jean- Claude Trichet, EU Economic and Monetary Affairs Commissioner Joaquin Almunia would lead a delegation to China for a dialogue on macroeconomic policies before the end of this year.

On the Japanese yen, the finance ministers also expressed concerns that it too was undervalued. “As stated by the Japanese authorities, the Japanese economy is on a sustainable recovery path. These developments should be recognized by market participants and be incorporated in their assessments of risks,” they said in the statement. “We note that the euro area is playing its role for an orderly reduction of the imbalances by implementing structural reforms and contributing to a rebalancing of growth,” they added. (peopledaily.com.cn)