Is the euro too strong?
We are close to the point where European officials will try to stem the euro's rise.
January 8, 2004: 9:18 AM EST
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Have we got to the point where Europe starts crying uncle over the euro?
The rise in the Continent's coin has almost certainly begun to sting. Up 20 percent against the dollar and a myriad of Asian currencies that are effectively linked to it over the past year, up 9 percent against Japan's yen, the euro's surge is making European companies less competitive against their global counterparts both at home and abroad.
Bad news for a European economy whose recovery is still fragile. Although the euro's strength will certainly give succor to consumers, since it will keep prices down, companies will be loathe spend money on new projects. "[W]e are seriously worried about the negative consequences of the super-strong euro on capex in Europe," wrote Morgan Stanley's European economic team in a recent report.
European policymakers are starting to grumble. Thursday it was European Union Trade Commissioner Pascal Lamy, who said the euro was getting close to an area where it might damage European competitiveness.
The European Central Bank left Europe's key overnight rate at 2 percent Thursday and following its meeting its president, Jean-Claude Trichet, said the euro's rise would not hurt export growth. But a growing number of observers believe the ECB is going to have to act. Lehman Brothers economist Klaus Baader points out that the euro is 5 percent higher now than the level the ECB reckoned would prevail when it prepared its projections for 2004 back in December.
Where until recently it looked like the ECB would be hiking rates this year, now it looks like a cut may be in order. Lehman's Baader thinks it will happen by March.
Such a move would have big implications the world over. So far, Europe has stood idly by while the United States and Asia have worked overtime putting through reflationary economic policies that have pushed their currencies lower.
If Europe jumps onto the reflationary bandwagon, the world economy is going to grow at an even quicker clip in 2004. And because everyone would be trying to keep their currency weak against everybody else's, other things -- gold, oil, copper, cotton -- would rise in price even more.
money.cnn.com
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I think CNN wants you guys to raise rates. |
