The newest demand, loudly voiced by French PresidentFrançois Hollande, is for the ECB to manipulate the exchange rate. The strengtheningexchange rate is putting additional pressure on the ricketysouthern European and French economies, undermining their already lowcompetitiveness.
The cheap credit ushered in by the euro fed an inflationary economic bubble insouthern Europe that burstwhen the financial crisis hit. Credit terms worsened abruptly, and what was left was the thoroughly overpriced rump of economies thathad become excessively dependent on foreign financing.
TheFrench economy, in turn, is suffering because its customers in southern Europeare in trouble. The ECB and the international community – particularlythe International Monetary Fund – have tried to deal with the crisis byreplacing the dearth of private capital withpublic credit.In order to stop these securities’ downward slide – andthus to save itself – the ECB bought these government bonds and announced that,if need be, it would do so in unlimited amounts. At the same time, the European Stability Mechanism was established to safeguardstates and banks.
These assurances managed to calm the markets and restartedthe flow of capital from the eurozone’s core to its periphery. But capital isflowing in from other countries as well. Holding euros and acquiringeuro-denominated securities have become attractive again around the world,pushing up the exchange rate and causing new difficulties.
Here, it should be said that the Bank of Japan’smanipulation of the yen’s exchange rate has played only a minor role。
Japanese intervention cannot explain the revaluation of theeuro against the dollar and many other currencies.
The ECB can curb the euro’s appreciation through purchasesof foreign currency. But, ultimately, it would have to do so by inflating itsown currency until confidence in the euro falls back to the level that it hadbefore the assurances were made.
The euro’s appreciation lays bare thehuge collateral damage that Europe’s rescue policy has caused. The measurestaken so far have opened channels of contagion from Europe’s crisis-ridden peripheral economies tothe still-sound economies of Europe’s core, placing the latter’s taxpayers andpensioners at great financial risk, while hindering long-term recovery in the troubledcountries themselves.True, Europe’s rescue policy has stabilized governmentfinances and delivered lower interest rates for the over-indebted economies.But it has also led to currency appreciation, and thus to lower competitivenessfor all eurozone countries, which may yet turn into a debacle for the southern eurozone andFrance, which are too expensive anyway, and for the euro itself.