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| Europe |
| Transatlantic rift grows over falling dollar |
| 2004-01-14 |
| From the Financial times, EFL & subscription required for full article. I’ve been watching the fallout from currency prices for several months now. France is co-ordinating efforts with Germany to ensure that next month’s meeting of Group of Seven finance ministers sends a strong signal on the need for stability in the currency markets. ’stability’ here means they want Euro-priced goods to be competitive against $-priced goods and they don’t want to change their central bank policies to get there But both countries are facing an uphill task in persuading the US administration of the need for G7 action to correct the steep decline in the dollar against the euro. The growing rift was highlighted on Tuesday when Alan Greenspan, chairman of the US Federal Reserve, played down the dollar’s weakness and repeated his view that he saw no problem in funding US deficits. His comments came just a day after Jean-Claude Trichet, the European Central Bank president, signalled his disquiet at the euro’s rise against the dollar, insisting it had been "brutal" and a sign of "excessive volatility". Speaking in Berlin, Mr Greenspan said he saw "little evidence of stress funding US current account deficits". In fact, there has been a small rush TOWARD US bonds in anticipation of economic improvement in the US, despite lower interest rates here. Counterintuitive, but it’s happened before & bespeaks confidence that the US will remain a leading global economy. He said the dollar had fallen broadly against other currencies. He conceded that the dollar’s steep decline had put eurozone exporters under pressure but noted it was not fuelling inflation, which remained "quiescent", or endangering the global recovery. His comments drew heavily on speeches he made two months ago when he stressed the dollar’s decline had created no "measurable disruption" and warned it was vital to thwart creeping protectionism. Over the past year the euro has risen more than 20 per cent against the dollar. European policymakers fear that the relentless rise of the euro could put the eurozone’s fledgling export-led upturn at risk. It wasn’t so long ago that Eurocrats threatened trade sanctions targetted to hurt Bush’s re-election prospects. The controlled fall of the dollar is a much more subtle but effective counter-thrust. Most analysts believe the Bush administration favours a weaker dollar to help domestic exporters and narrow the ballooning trade deficit. It would be loath to see a dollar rise just ahead of the presidential election. "It will be pretty hard to get the US on board [at the G7]," said Mark Cliffe of ING. " The US is on a global growth campaign and the ball is now very firmly in Europe’s court." This is the money quote. He said the ECB might have to cut interest rates before the US was prepared to sanction any G7 concern about exchange rates. Not too long ago, Eurocrats were chuckling over prospects that investment money would flow from the $$ to the Euro and that major industries would start pricing products in Euros instead of dollars. If they have to lower their interest rates to try to deal with the major structural problems that haunt the Eurozone economies, the $ may well continue to be attractive despite the projected deficit spending. There are other side-effects of a lower $. The value of outstanding Treasury debt drops when the dollar is lower against other currencies. Not a trend we want to go too far, but in the short run and to a limited extent, this is a very effective tactic to indirectly have those debt holders help to pay for the war on terror. Since some significant portion of that debt is probably held by oil princes, there is also a certain amount of poetic justice here. As with most aspects of macroeconomics, this can all be carried too far: we want our debt to be considered worth holding and we want there to be global consumers who are wealthy enough to buy our products and services. But I somehow doubt that the French and Germans will get much of a sympathetic hearing at the G7 meeting given how flagrant their gloating was last year. Germany’s issue is deeper in that, since the rampant inflation of the early 20th century, their banks have always favored stability over growth. But that comes at a major cost with the post-war generation aging - without growth it will be very hard for them to meet their pension etc. obligations. |
| Posted by:rkb |
| #10 Anyone remember the whining in the 80s? Even the IMF had to agree that we're the engine of world growth, bet that had to bite. A few days later they claimed we're disorderly. What I still find interesting is this, thanks to Econopundit.com. A little old, but Steven doesn't think it had changed too much: ------------------------------------------------------------------------------------------ GOVERNMENT DEBT AND PENSION LIABILITIES AS PERCENT OF GDP (1990) ===net conventional debt=======net pension liabilities CANADA===52================121 GERMANY==22================157 ITALY====100================259 UK=======27================156 US=======35=================90 ----------------------------------------------------------------------------------------------- Source: Essays on Pension Reform, Max Alier PhD Thesis, University of California LA, 1997; quoted in R.E.A. Farmer, Macroeconomics, South-Western, 2002, p. 162. |
| Posted by: Anonymous2U 2004-1-14 9:27:29 PM |
| #9 There is a 2nd issue linked to this one, namely the intent to file suit against the deficit waivers given to Germany and France again this year. Poland, Spain and Italy are among the countries who are insisting that the EU actually enforce its economic discipline rules. If I recall correctly, a while back Spain and Italy had some hard times when France & Germany insisted they toe the economic line and they are outraged at the idea that the two larger countries can cavalierly ignore the same rules for several years in a row. One justifiable reason for the current $ valuation is that we will be doing some deficit spending during the war on terror. But Greenspan is right: the high interest rates in the EU do serve as a trade protection barrier *if* the US can be strongarmed into propping up the dollar. In the short run, European consumers benefit from a strong Euro, just as companies that manufacture using $-based labor and materials benefit from selling to those European consumers. In the mid-term, however, the result will be more employment in the US and a smaller tax base for the EU governments. Check out Martin Wolf's column in the FT today, if you're a subscriber: he makes the case, despite himself, that the American consumer is confidcnt and is a driving force in the US recovery, while the European consumer is not confident and is not doing the same. I don't really want to indulge in too much schadenfreude here, if only because I do realize the potential downsides for me, in the long run, to having Europe continue to stagnate. But frankly, given the sanctimonious and condescending attitudes that have come our way from Europe in the last few years - and especially given the overt announced threat by EU officials to use trade sanctions to negatively affect jobs in some key election states here, so as to defeat Bush -- well, it's worth noting that things aren't playing out quite that way at present. And, while you feel comfortable, a quick Google of recent news makes it clear that French and German politicians, and the EU finance people, are running scared over this. |
| Posted by: rkb 2004-1-14 4:57:20 PM |
| #8 Mr. Davis, don't hold your breath just yet. I'd rather see Germany reverting to DM than Spain to Peseta and Italy to Lire. It won't happen. |
| Posted by: True German Ally 2004-1-14 4:46:05 PM |
| #7 TGA, We'll all survive. The question is whether the Euro will. Perhaps the Spanish and Italians will have second thoughts about having hitched their economic wagons to Das Frankenreich. |
| Posted by: Mr. Davis 2004-1-14 4:27:49 PM |
#6 I'm sure this little tidbit is entirely unrelated:WASHINGTON (Reuters) - The U.S. trade deficit narrowed unexpectedly in November while wholesale prices outside of food and energy posted a surprise drop last month, government reports showed on Wednesday. Payback, as they say, can kick you right in the crotch if you're an America-bashing eurocommie. |
| Posted by: 4thInfVet 2004-1-14 4:20:43 PM |
| #5 Fred and Steve's favorite saying come to mind here: Cause and Effect. |
| Posted by: Charles 2004-1-14 4:12:02 PM |
| #4 Mr Davis... if it is payback, it's payback for Aznar and Berlusconi as well. Despite the strong Euro Germany is Number 1 export nation in the world again and is likely to remain so in 2004. We export more than the U.S., go figure. Most exports are inside the EU, so the dollar rate doesn't influence them. Energy prices are lower, holidays outside the EU zone cheaper (hello Miami?). When the Euro was worth 84 cents people whined, now it's worth 1,27 dollars and other people whine. In 1995 the dollar traded for DM 1,37 (70 US cents or €1 = $1,42). We survived that too. |
| Posted by: True German Ally 2004-1-14 4:11:37 PM |
| #3 Trade, like other things, tends to roll downhill. |
| Posted by: mojo 2004-1-14 3:59:27 PM |
| #2 The run-up of the Euro is also threatening adoption of the Euro by additional countries, a goal dear to Das Frankenreich, especially when others see that an Audi A8L is selling for a third less in the US than its Euro price in Europe according to the Wall Street Journal. This is serious payback and it couldn't happen to a better pair than Chiraq and Schroeder. |
| Posted by: Mr. Davis 2004-1-14 3:56:57 PM |
| #1 Why won't the EU central bank lower interest rates to stimulate growth? Is it a hold-over from the German central bank historic fear of inflation? |
| Posted by: Shipman 2004-1-14 3:49:36 PM |