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Thursday, December 18, 2003

ECB Begining to Interest Itself in the High Euro Problem

The euro continues its rise, and some of the potential consequences are begining to sink in. The idea, I think, is that a rising euro will make pressure for structural reform. This is why the talk is of a 'controlled rise'. The problem is if the dollar declines with a jolt in some moment accompanied by a run for the door. Then the impact could be important. We watch and wait.

A member of the governing council of the European Central Bank has warned that a "too rapid strengthening" of the euro could threaten the fragile recovery under way in the eurozone.

Nout Wellink, the president of the Dutch central bank, said the single currency's appreciation - the euro surged on Wednesday to an all-time high against the dollar - was "one of the risk factors" for the European economy. He warned that a "sudden movement" in foreign exchange markets could dent eurozone growth prospects.

In an interview with the Financial Times and FT Deutschland, Mr Wellink said the ECB wanted to see a "smooth appreciation" of the euro, "one that does not disturb the economic process." He added: " What I do not like to see are sudden movements."

ECB officials have tended to play down the strengthening of the euro, preaching the benefits of a strong currency and insisting it is not far removed from its long-term average value, a point reiterated yesterday by Otmar Issing, the bank's chief economist.

He told Bloomberg News that the euro "is essentially back where it started." As a result ECB officials claim the euro's rise should not have major consequences on European company competitiveness. They also say the effects of euro appreciation are being offset by strong global growth.

However economists believe the ECB is concerned about the risks of a stronger euro and are braced for further appreciation. The huge US current account deficit is unsustainable and is expected to lead to persistent dollar weakness as global imbalances adjust.

The Bundesbank, Germany's central bank, warned this week in its monthly report that the US current account deficit posed a substantial risk of sudden currency movements which could dent growth prospects in the eurozone's biggest economy.
Source: Financial Times

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