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Euro's rise sparks gloom, applause

A sculpture of the euro is seen in front of the European Central Bank in Frankfurt, Germany, last Monday. The euro rose to an all-time high of 1 euro to US$1.4263 on Friday. PHOTO: AP

The high-flying euro, which last week soared from record to record against the dollar, has sparked sharply contrasting reactions in France and Germany, with Paris complaining and Berlin applauding.

The single currency, shared by 11 other European nations besides France and Germany, shot to a new all-time high of one euro to US$1.4263 on Friday.

While French President Nicolas Sarkozy has made no secret of his distress at the euro's upward trajectory, which tends to punish French exporters, his German counterparts remain serene.

Germany "prefers a strong euro to a weak euro," a spokesman for the German Finance Ministry said last week.

A rising, healthy euro, tending to exert downward pressure on prices of imported products, acts as a shield against inflation, notably by mitigating the effects of steeper oil prices.

A strong euro can however dampen eurozone exports, making goods more expensive and therefore less attractive to foreign buyers. But Germany has so far been largely spared such ill effects, notably as it specializes in high-quality capital goods that are less susceptible to competitive pressures.

"I wouldn't go as far as saying [the strong euro] is a good thing because export growth has been very supportive of the economy."

Jennifer McKeown, Capital Economics analyst

Some economists argue the trend in the euro-dollar relationship will stimulate domestic consumer demand and help restore a balance to eurozone economic momentum, which until now has been heavily dependent on exports.

"I wouldn't go as far as saying [the strong euro] is a good thing because export growth has been very supportive of the economy and good for the economic recovery," analyst Jennifer McKeown of Capital Economics said.

"That said, we are hoping for some rebalancing, hoping that consumer growth is going to pick up," she said.

McKeown said France had a "structural" problem that Germany appeared to have overcome, leaving it less vulnerable to the negative impact of a strong currency.

The French "haven't been able to hold back their costs the way the Germans have, when labor costs went through a long period of falling outright and which made them able to maintain their competitiveness," she said.

At Dutch bank ABN Amro, Dario Perkins said that "the impact of the recent rise in the euro probably isn't as great as Mr Sarkozy fears."

While the euro has gained almost 12 percent on the dollar in the past year, what really counts is its performance against a basket of other representative currencies.

"It is the real trade-weighted index that matters for the euro area economy. On this measure, the euro isn't particularly high by historical comparisons. It has increased by only 4.0-5.0 percent since the start of 2006," Perkins said.

He said that the "euro strength suggests global investors are becoming more optimistic about the region's long-term prospects."

"What the Germans are getting at, and it's a point made also by the European Central Bank president [Jean-Claude Trichet], is that the strength of the euro is a reflection of the strength of the economy," McKeown said.
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