Trading at 1.18/1.19 to the dollar, the euro has become a pricey currency. But the European currency has also gained against all other currencies as its effective exchange rate has returned to levels unseen since the end of 2014. So we can no longer count on the euro losing value. This makes the ECB’s job harder as a strong euro allows for importing disinflation, thereby pushing back the chances that inflation in the euro area will swiftly converge towards the 2% target set by the central bank.
We can make three initial remarks on this situation.
The first is that the euro’s swift rise looks like a monetary restriction. Monetary policy has become more restrictive and the ECB’s stance must confirm its aim for accommodation in the long term so as not to increase potential expectations on a change in course. The second remark is that a strong euro is coherent with the euro area’s very high external surplus. The decline in the euro was not compatible with this surplus. The last remark is that the dollar is weak. Its effective exchange rate is at its lowest since the end of 2016: America is not doing well.
Following on from these three remarks, we can derive three explanations to understand this currency movement. Continue reading
I write a weekly column on the Forbes French website. I will now translate them into English. You can find the original column here in French.
You will find below my yesterday’s column on risks associated with an exit from the Euro Area
The presidential and general election dates are fast approaching in France and the issues at stake are becoming clearer. One question that keeps coming back to the fore is France’s exit from the Eurozone. Commentators focus most particularly on what would happen in the immediate aftermath, once the country formally exits the currency union, and they are quite right to do so, as a number of very relevant questions need to be raised. Continue reading
In an article in the Financial Times, this morning (see here), Joseph Stiglitz suggests a two-speed euro area. There are two points in this article: One is the usual bashing of the euro as a very bad idea, the second is on the necessity of a two-speed Eurozone from the current situation. The main reason is associated with the absence of adjustments between countries that do not go at the same speed and with very different characteristics. Therefore the dynamics is far from optimal leading to a very inefficient situation according to Stiglitz.
A two-speed euro is not a good idea as I think that it would be the end of the Euro Area. Continue reading