[lbo-talk] French Push Euro Countries to Confront ECB

Yoshie Furuhashi critical.montages at gmail.com
Wed Jul 18 07:47:22 PDT 2007


<http://www.iht.com/articles/2007/07/17/business/euro.php> French push euro countries to confront ECB By Katrin Bennhold and Carter Dougherty Tuesday, July 17, 2007 Click here to find out more!

PARIS: France will press for governments of the 13 countries sharing the euro to directly confront the European Central Bank over interest rate policy, in an effort that many European officials believe is designed to lower the value of the euro vis-à-vis other currencies.

Outlining for the first time the vision of the new French administration of how the euro area should operate, Jean-Pierre Jouyet, the country's minister for European Affairs, said that France would lobby for more regular - and more substantive - meetings between the euro group of finance ministers and the ECB president.

"You can influence the ECB's decisions by having a more open discussion about the motivations behind interest rate decisions," Jouyet said during an interview. "You can have those discussions discretely and in the framework of the euro group."

Jouyet said discussions should cover the four key variables determining the bank's interest rate decisions: productivity levels, inflationary trends, public finances - and exchange rates.

But the initiative will almost certainly face intense opposition from the ECB and other European countries, notably Germany, where memories of historic bouts with inflation underpin a deep commitment to a fully independent central bank.

According to central bankers and finance officials, the drive is seen mainly as an effort to bolster the ailing French export industry.

That said, it is possible that the rising euro, which flirted with a record of $1.38 again Tuesday, could realign monetary politics in Europe.

If the strong currency saps the strength of more and more exporters, it could lead other countries to support the French position.

As a presidential candidate, Nicolas Sarkozy, now president of France, had vowed to lobby for a change in the ECB statutes, and demanded that the bank support economic growth and help lower the value of the euro to support exports.

His rhetoric has created lasting suspicion across Europe about his intentions and reinforced the perception that he attacks the ECB for domestic political reasons.

"What everybody fears is that when the French talk 'economic coordination' that what they mean is to coordinate à la française, and impinging on the overall independence of the ECB," a European Union finance official said.

Several European officials also have stressed that the French have not until now concretely articulated what they want. "Sarkozy speaks loudly, but not very clearly," another official said.

Chancellor Angela Merkel of Germany and Sarkozy, during a meeting in Toulouse, France, on Monday, tried to show unity on economic policy but could betrayed underlying tension.

Sarkozy urged Merkel, as chair this year of the Group of Eight, to put the issue of "monetary dumping" on the international agenda. Merkel, with Sarkozy looking on, criticized "the wrong kind of interventionism" on the euro.

"There are interventionist ways, where you say that the ECB should change something about its interest rate policy," Merkel said. "I believe that is the wrong way."

In recent days, Sarkozy and other French officials have backed away from demands to change the Maastricht Treaty, which safeguards the independence of the ECB and defines its primary goal as fighting inflation.

As one French diplomat, who spoke on condition of anonymity because of the sensitivity of the topic, put it: "We have understood that we have not got majority backing on this issue."

The new French line is that the existing legal framework can accommodate a more robust dialogue with the ECB.

"We don't want to reform the treaty or touch the independence of the ECB," Jouyet said. "But when you're evaluating a country's economic situation you have to consider the whole picture: exchange rates, interest rates, public finances and growth. We want to talk about those factors.

"It's the spirit of the treaty and the purpose of the euro group."

The ECB seems sure to fight the creation of any institutionalized dialogue for fear of compromising its independence. The president of the ECB, Jean-Claude Trichet, who vigorously defended the independence of the Banque de France against pressure from the former French president, Jacques Chirac, has already rejected this approach.

Last year Trichet refused even to answer a letter from Jean-Claude Juncker, the Luxembourg finance minister and president of the euro group, that demanded a more formalized consultation process, even though Juncker did not - as France has done - say he wanted to gain more influence over the bank. Trichet argued that politicians and ECB officials already saw each other regularly at monthly meetings of the euro group, an informal body comprising finance ministers from the 13 nations using the euro.

"I do not think that you will find such an intimately organized relationship between a monetary authority and an executive branch anywhere in the world," Trichet said at the time.

On exchange rate policy, the heart of French concerns, European treaties give the ECB, and its defenders in some euro countries, a very strong hand.

Central bankers stress that the euro's current value is the natural result of European economic strength, a point the French dispute.

"Today the problem is that the level of the euro has reached historical heights not just vis-à-vis the dollar but also the yen and the yuan," Jouyet said. "We are at levels where there is no relation between the strength of the economy and the currency. The Chinese are growing into a formidable economic power and their currency is undervalued. The growth is back in Japan and the yen is undervalued."

EU treaties stipulate that European Union leaders can "in exceptional circumstances" create "general orientations for exchange-rate policy." But the text also stresses the bank's independence and its primary mandate of keeping inflation in check.

Jouyet also emphasized that intervention in currency markets, if euro-zone members agreed on it, had to be "coordinated between treasuries and central banks within the G-7."

Jouyet also spoke in favor of a more coherent European voice in international financial affairs, a policy that, in theory at least, enjoys wide support around Europe, including from the ECB.

One proposal is to increase the visibility of the euro group's president at international financial forums like the International Monetary Fund or the Group of 8, which often also count among their guests the ECB president.

ECB officials have generally welcomed this idea, but have stressed that if national finance ministers do not adhere to a common line - and the French are loath to give up national prerogatives - they will weaken any European official they appoint. -- Yoshie



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