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IMF’s Deppler: Don’t overstate $1.60 euro problem

The euro zone has not suffered as much as many often feared from the rise of its currency and the impact of a $1.60 exchange rate should not be blown out of proportion, the head of the IMF’s European department says.

Michael Deppler, director of the European department at the International Monetary Fund, spoke to a group of reporters about the euro on Tuesday shortly before it edged up to a new record just above $1.60. “It’s obviously a problem, but the problem should not be exaggerated,” Deppler, in Paris to present an IMF report on Europe’s economy, said. “In my opinion, there is a rise in the value of the euro and there is a rise in the (economic) fundamentals of the euro zone, which means the figure of 1.60 today doesn’t mean what it meant five years ago,” said Deppler, who spoke in French. “That does does not mean it will not have perverse effects but at first sight it’s not clear that the effects are as perverse as one might have feared in the past,” he said.

The euro has risen more than 17% versus the dollar in the last year and in the region of 40% over the past five years, according to Reuters data which showed it hitting 1.6010 late in the European afternoon on Tuesday. Among the improved economic fundamentals Deppler referred to were healthy exports, a better employment situation and a current account more or less in balance. “We’ve always underlined that there were risks for the euro in the international situation,” Deppler said. “We agree that the euro is overvalued regarding medium-term equilibrium value, and that it’s above all overvalued versus Asian currencies,” he said. “The real problem is China and Asia generally.”

The IMF forecasts a significant slowdown in the euro zone in 2008 and 2009 because of a deteriorating global economic climate, but that follows two very strong years by European standards, with growth of 2.6% in 2007 and 2.8% in 2008. That compares to growth rates of closer to 1% five years earlier. An appreciating euro makes it harder for euro zone exporters to compete on price in export markets, obliging them to look for ways to trim costs to contain sale prices or to move into areas where price is not the sole determinant of market share. (Reuters)