How Crucial Is The Euro Exchange Rate?

Ulli Europe Contact

91551519There has been a divergence of opinion recently among the eurozone policymakers over the common currency’s valuation. While French President Francois Hollande had called for the euro’s devaluation, Bundesbank chief Jens Weidmann ruled out any intervention by the European Central Bank, stating the euro’s valuation is in line with the region’s fundamentals and any currency manipulation may result in higher inflation later.

Peter Bofinger, economics professor at the University of Wuerzburg in Germany and an economic adviser to German Chancellor Angela Merkel, thinks the ECB should keep an eye on the euro since a strong currency can harm exports.

Asked to comment about Jens Weidmann’s (German central bank chief) position in the ECB, Peter said the Bundesbank is a bit isolated in the ECB, but the more important point is that the OMT announcement by ECB President Mario Draghi has really helped to stabilize the region’s economy and Jens is happy about it.

Asked if he would agree with Jens Weidmann’s observation that the euro should not be weakened simply to drive economic growth in the region, Peter said the appreciation of the single-currency in the last few months certainly make the adjustment process in the peripheral countries more difficult.

But one must also bear in mind that from a longer-term perspective, the euro is certainly not overvalued. The ECB is keeping a watch on the current developments and any further rise of the shared-currency will be detrimental for the adjustment that would be required in the euro-area, he noted.

Asked why he thinks Germany is not the economic motor of Europe, Peter said latest GDP data showed internal demand has been fairly weak in the last three months of 2012 and the growth momentum that was witnessed earlier has been lost. This is bad news for other countries in the region as they were expecting the German economy to fire on all cylinders. German policymakers need to consider the latest slowdown because countries wish to get out of the current slowdown as fast as possible, he observed.

Germany seems to have thus far resisted the idea that it should act as a driver of demand, particularly for domestic demand. Asked how much room does Germany has to hike wages in order to drive domestic demand and act as a market for others goods around the world, Peter said one of the ways to make the adjustment process easier for other countries in the euro-area would be a wage-increase in Germany and he has recommended a 2 percent surcharge on wages in this year’s wage negotiations to boost domestic demand. That being said, one must also think about fiscal policies where Germany has a lot of room for maneuver since it has an almost balanced budget, he added.

Asked what kind of feedback he gets from the Merkel administration, Peter said his impression is that Germany’s policy paradigm is shaped by the so-called Swabian Housewife’s view, which means savings is the solution to the problems, but it neglects the overall global situation. The overall global economy is only growing because there are rather high deficits in the United States, in the United Kingdom and in Japan, he concluded.

You can watch the video here.

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