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Wednesday, January 14, 2004

All At Sea And Bereft Of Strategy

That's the painful and delicate situation that the French and German governments find themselves in right now. Simply sending a 'strong signal' about the need for stability is about tantamount to (and probably worse than) doing nothing. Whilst an 'optimistic' and relaxed Alan Grenspan gave a polished performance in Berlin (he is of course the greatest man of the theatre of them all) the atmosphere here in Europe is begining to border on panic. While Greenspan waxed about how"There is, for the moment, little evidence of stress in funding U.S. current account deficits," and how the widening to record levels of the ratio of current account deficit to gross domestic product had been, "with the exception of the dollar's exchange rate, seemingly uneventful", US Treasury securities price rose, sinking yields to three-month lows , offering the promise of continuing low mortgage rates and thus continued support for the US housing market. Now, as I am indicating, everything in the US garden is far from Rosy, but at least they have a strategy which bears some relation to the underlying reality, and they are determined to enforce it.

Over here in Europe the reaction to the rise is belated, there is little understanding of the what the game is about, and there is a complete absence of adequate policy. Asking the US to accept deflation so Germany can avoid it simply doesn't seem credible in my book. Where all this will end I do not know. But the endgame doesn't look too pleasant.

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.

My feeling is that we won't see any big change in exchange rates now ahead of the G/, but that next week, possibly after an initial hesitation, we will see the dollar decline continue it's course.

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.

European officials said the two sides were holding increasingly antagonistic views. European governments and central bankers are increasingly concerned about the problem while US officials insisted there were no grounds to act.

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". 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.

Gerhard Schröder, the German chancellor, is understood to have expressed unease about the "abrupt exchange rate movements" during a meeting with Mr Greenspan. "He is not watching this without concern," said an official.

In Paris, Francis Mer, the French finance minister, told the national assembly that France would try at the G7 meeting - to be held in Boca Raton, Florida, on February 6 - "to send the correct signals to the markets . . . it is not the euro which is strong but the dollar that is too weak."

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.

But European officials said initial work on a G7 draft had shown the US was concerned about any language that could cause the dollar to rise again.
Source: Financial Times

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