<<they still wanted currency flexibility, but the right kind of flexibility: not for themselves but for others. In doing so, they in effect called on several Asian and Latin American countries to revalue their currencies against the dollar.>>
It's been always like that: They party the rest of the world pays the bill! They party, we get the hangover!!!
A bad result
By Wolfgang Munchau
Published: February 8 2004 19:21 | Last Updated: February 8 2004 19:21
At the Group of Seven meeting in Boca Raton, Florida, the Europeans got everything they wanted - yet this will probably not make much difference.
The G7 finance ministers and central bankers managed to reverse the exchange rate policy stance they agreed in Dubai last September. There, they issued an indiscriminate call for currency flexibility that subsequently triggered a severe market reaction against the dollar.
This weekend, they said they still wanted currency flexibility, but the right kind of flexibility: not for themselves but for others. In doing so, they in effect called on several Asian and Latin American countries to revalue their currencies against the dollar. Jean-Claude Trichet, president of the European Central Bank, put it like this: "The various currencies that are not flexible will recognise themselves. There is not only one, there are quite a few."
The G7's final communiqué is a triumph of financial diplomacy and yet, in terms of content, it is full of hot air. There is no chance that countries with a dollar peg, such as China, will revalue or even float their currencies. The G7 meeting has not changed the fundamental reality that the euro's rise against the dollar remains in grave danger of overshooting, with serious consequences for the eurozone economy.
The carefully crafted communiqué even contains an internally contradictory statement: that exchange rates should reflect fundamentals and should not move in a disorderly fashion. The truth is that the need to adjust to fundamental economic imbalances is one of the main reasons why the dollar has fallen in such a disorderly manner over the past year.
The G7 finance ministers walked a thin line between seeking stability and flexibility. What they came up with was probably the best diplomatic effort under the circumstances. As we have seen in Dubai, the wrong kind of words can cause damage. The right kind of words can at least prevent damage.
The Boca Raton statement even included a vague promise by the G7 to "co-operate as appropriate" though they were careful not to include any specifics. In reality, neither the Americans nor the Europeans have a plan B. The pledge to co-operate should not be interpreted as the beginning of a global exchange rate policy, especially as there appears to be no agreement over how far the dollar can fall before any such undefined co-operation should kick in.
The trouble is that not a single participant has considered adjusting domestic policy. The US administration will not suddenly begin to reverse its tax cuts. The monetary policy stance of the European Central Bank has remained unchanged. As for structural reforms in Europe, the general drift goes in the opposite direction. Last Friday's resignation of Gerhard Schröder, Germany's chancellor, as chairman of the ruling Social Democratic party has in effect put the economic reform programme on hold until the elections in 2006. Nor can we expect any structural shifts from France and Italy, the other two large economies in the eurozone.
The eurozone could, if it wanted, accommodate the dollar whatever its level through looser monetary and fiscal policy combined with faster structural reforms in labour, product and financial markets. Such changes would go a long way to boost short-term growth and long-run growth expectations.
In terms of its size and characteristics, the eurozone is not very different from the US economy. Large economies should normally treat the exchange rate with benign neglect. The Europeans find it difficult to think this way.
This is why eurozone officials place such emphasis on financial diplomacy. The attempt to talk the dollar up may well succeed in influencing foreign exchange dealers in the short term. For the eurozone, in particular, there is a lot at stake. As long as the euro's rise against the dollar does not overshoot, the economy is headed for a robust cyclical recovery.
But even the most adroit financial diplomacy cannot change the underlying fact of the case: the risk of a further fall in the dollar was real before the finance ministers met in Boca Raton - and it is still real the morning after.
wolfgang.munchau@ft.com |
