European Central Bank (ECB) board member Lorenzo Bini Smaghi Tuesday defended the bank's role in the aftermath of a warning by European Union leaders over the relentless rise of the euro against the U.S. dollar.
Smaghi said the ECB's main task is to keep prices stable and avoid the effects of second-round inflation, adding that exports have held up well in recent years despite the rise of the euro.
Smaghi's remarks came after EU leaders issued a rare collective warning at their summit Friday.
Though analysts expect little impact on the direction of markets from the warning, it sent a clear signal that Europe is becoming uncomfortable with a stronger euro.
"UNPRECEDENTED" WARNING
Wrapping up a two-day summit here Friday, leaders from the 27 EU member states made a last-minute addition to their final conclusion which said, "Excessive volatility and disorderly movements in exchange rates are undesirable for economic growth."
"In the present circumstances we are concerned about excessive exchange rate moves," said the leaders, breaking with the convention that EU heads of state or government normally steer clear of direct comment on exchange rates in order to respect the independence of the ECB in handling euro policy.
Luxembourg Prime Minister Jean-Claude Juncker said such an explicit reference to exchange rate levels was "unprecedented."
The warning came as the euro climbed to a series of new highs against the dollar. Up to Monday, the single currency of the 15-nation euro group had touched 1.5903 dollars in New York trading, the lowest level since it was introduced to world financial markets as an accounting currency in 1999.
BREWING NERVOUSNESS
Analysts said the unusual warning underlined the nervousness among European politicians and business leaders about the euro's steep climb against the dollar and other currencies.
A strong euro is certainly a burden for European exporters, making their goods less competitive in the United States and other dollar-linked markets.
Figures from the EU's statistics bureau Eurostat showed that eurozone exports slowed down significantly in the fourth quarter of 2007, from 2.1 percent in the previous three months to 0.5 percent.
When the euro passed 1.40 dollars several months ago, European companies said they had crossed a "painful threshold."
"We consider the euro and the dollar as two potential weaknesses for the future and I hope something will be done about them," Business Europe President Ernest-Antoine Seilliere said.
As exports have been one of the engines driving the European economy, EU policy makers were particularly worried that a strong euro is forcing some European companies to leave the continent. Airbus, among other European large enterprises, had threatened to shift its production line out of the eurozone in a bid to maintain competitiveness, something which is bound to affect local investment and employment.
NOT ALL BAD FOR EUROPE
However, a strong euro is not all bad for Europe. The continuous appreciation of the euro basically reflects the relative good performance of the European economy compared to the U.S. side, which can help the euro strengthen its international position.
When prices of oil and raw materials, which are traded in dollars, keep rising, a strong euro can also help rein in inflation.
So far, the Frankfurt-based ECB, unlike its U.S. counterpart, has refrained from making an interest rate cut to boost economic growth due to inflation concerns which, to a certain extent, have contributed to the rally in the euro against the dollar.
For those countries that have been slow to reform their economies, such as France and Italy, a surging euro has been especially unbearable.
French President Nicolas Sarkozy had long criticized the ECB's monetary policy for keeping the euro too high.
In countries like Germany and the Netherlands, which benefit from years of reform, the rise of the euro has been less catastrophic, though only in relative terms. Therefore they have strongly supported the independence of the ECB and opposed political influence.
The European Commission President Jose Manuel Barroso said it was policymakers at the ECB, not politicians, who were responsible for the euro's value.
"The problem is not so much that the euro is strong as that the dollar is weak," he said, adding that EU leaders had a limited ability to influence the direction of markets.
"We cannot have the illusion that because there's a summit in Brussels, they can give some kind of instruction or signal and tomorrow there will be a completely different situation," he said.
Source:Xinhua
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