Robert, here's a whole mess of guesses on the future shock form 'Euroland' (loved McDonough's catty remark)...to keep you on your toes when selecting pampers over the-other-brand and me out of tamburitza clubs* [Oh gosh no, not target zones....we can't even handle dumping....]
Nancy
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Financial Times 12/29/98
US plays down exchange rate target zones
Emu launch will make little difference to American policy of benign neglect of dollar, and active management idea finds little favour, reports Wolfgang Münchau
US officials are pouring cold water on Franco-German suggestions for target zones in the exchange rate between the euro and the dollar.
The comments suggest that the US will continue to pursue a policy of benign neglect towards the dollar, and that the launch of European economic and monetary union (Emu) on January 1 will make no difference to present US policy.
The debate over exchange rate policy in the future euro-zone has been triggered by concern in Europe over possible exchange rate instability next year. A growing number of European finance ministry officials, central bankers and academics believe the euro could appreciate strongly against the dollar during 1999, as international investors pile into euro assets.
William McDonough, president of the Federal Reserve Bank of New York, said in a recent interview that the arrival of a new competitor to the dollar would impose strong disciplines on US economic policy.
But he rejected suggestions that the euro-dollar exchange rate should be constrained through target zones or other means of active policy management. "I don't think it is realistic or desirable to have an agreement on target zones. The best thing for Euroland is to run its economy properly."
This view is fully shared by senior officials in the Clinton administration. One official indicated that a policy shift would not be considered unless there was a serious crisis in the foreign exchange markets.
Fred Bergsten, director of the Institute of International Economics in Washington, is one of the few US advocates of exchange rate target zones. He said Japan's recent policy shift in support of target zones had added significantly to the weight of international opinion favouring a more activist exchange rate policy.
He also noted that the coming US presidential elections could accelerate the decline in the dollar, as presidential candidates were bound to blame the $300bn current account deficit for the loss of US manufacturing jobs. He said the dollar could prove vulnerable to an election campaign hijacked by rhetoric on trade protectionism.
"The only way to reduce the deficit is through a lower exchange rate. Rubin's strong dollar rhetoric will then be thing of the past," he said.
While US officials are relatively unconcerned about the exchange rate, they appear both concerned and baffled by economic policy inside Europe itself.
There is near-unanimous agreement among US officials that Emu's survival depends on Europe's willingness to embrace more flexible labour, product and financial markets.
Even economists such as Professor Paul Krugman of the Massachusetts Institute of Technology, who in the past have criticised Europe's central banks for running overly conservative monetary policies, now say the centre-left governments have shifted their focus too far from micro-economic reform towards macro-economic demand management as a tool for reducing unemployment.
Macro-economic policy, said Professor Krugman, could for example reduce unemployment in Germany by only some 2 percentage points.
There also remains great concern and confusion over the policies and strategies of the European Central Bank itself. One senior official at the International Monetary Fund said Europe's central bankers were wrongly attaching a significant weight to monetary indicators in their public pronouncement, while effectively ignoring these data in their day-to-day policy decisions. This disjunction between policy and action, he said, was cause for serious concern.
Even among US central bankers there is some concern that the strict rules and numerical targets the ECB has set itself could interfere with the need to act with sufficient speed and flexibility. This would be particularly important if the recent global financial turmoil were to erupt again.
The best hope is that the ECB will continue to act as pragmatically as it did earlier this month, when European central bankers agreed in unison to cut interest rates from 3.3 to 3.0 per cent. Nothing in the ECB's pronounced strategy made that concerted action necessassary.
*tamburitza, stringed instrument common to the 'provincial tango culture' of the Balkans...
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