ECB takes aim at Sarkozy over euro
Saturday, 7 July 2007
Ralph Atkins in Frankfurt
The European Central Bank launched a stiff defence of eurozone exchange rate policy-making last Tuesday in an apparent rebuff to Nicolas Sarkozy, the French president.
Current arrangements for setting policy, giving the ECB a large role, were "more efficient" than those of the US or Japan, Lorenzo Bini Smaghi, an ECB executive board member, said in Rome.
But the eurozone could strengthen its hand internationally if it built on the European Union's plans for a new foreign policy tsar and streamlined the external representation of the 13-country currency bloc, especially in international institutions. Finance ministers also needed to be more disciplined in commenting on exchange rates.
Mr Bini Smaghi's comments are likely to be echoed next week by Jean-Claude Trichet, ECB president, at a meeting of European finance ministers, which Mr Sarkozy will also attend. The French president argued last month that the eurozone "should not be the only area in the world where the currency is not put at the service of growth".
In Frankfurt, Mr Trichet noted the strong support in France for the ECB's independence.
The ECB believes that controlling inflation and structural reform are the best ways to boost growth. But Mr Bini Smaghi made clear the limitations of exchange rate policy. An effective policy needed co-ordination between politicians and a central bank, and any action would have to be taken in concert with the US and Japan.
"Intervention is unlikely to have a lasting effect in the foreign exchange markets unless it is expected to be followed by domestic policy action, especially concerning interest rates," he said.
In contrast to the US and Japan, where the finance ministry sets the exchange rate regime and intervenes in exchange markets, eurozone central banks hold and manage foreign exchange reserves and have responsibility for any market intervention. Finance ministers can set "general orientations", which Mr Bini Smaghi argued would have to be agreed by the ECB, but have not exercised that right since the launch of the euro in 1999.
He said the current system had proved effective in 2000, the last time the ECB intervened, but institutional arrangements could still be improved. Problems were created when finance ministers clashed ahead of international meetings - with the public airing of differences undermining any subsequent agreement.
This had happened in February, ahead of a meeting of finance ministers from the Group of Seven industrialised countries. "Some euro area finance ministers expressed concern and dissatisfaction with the level of the euro exchange rate, especially vis-à-vis the yen, while other ministers indicated that the euro exchange rate was appropriate."
The political complexity of the EU weakened its ability to pursue its interests internationally, said Mr Bini Smaghi. But the agreement on an EU reform treaty, creating a "high representative of the Union for foreign affairs and security policy", showed progress was possible on political integration. In a clear hint at the ECB's preference, he asked: "Could this decision also represent a way forward in the field of the external representation of the euro area?"
The European Central Bank launched a stiff defence of eurozone exchange rate policy-making last Tuesday in an apparent rebuff to Nicolas Sarkozy, the French president.
Current arrangements for setting policy, giving the ECB a large role, were "more efficient" than those of the US or Japan, Lorenzo Bini Smaghi, an ECB executive board member, said in Rome.
But the eurozone could strengthen its hand internationally if it built on the European Union's plans for a new foreign policy tsar and streamlined the external representation of the 13-country currency bloc, especially in international institutions. Finance ministers also needed to be more disciplined in commenting on exchange rates.
Mr Bini Smaghi's comments are likely to be echoed next week by Jean-Claude Trichet, ECB president, at a meeting of European finance ministers, which Mr Sarkozy will also attend. The French president argued last month that the eurozone "should not be the only area in the world where the currency is not put at the service of growth".
In Frankfurt, Mr Trichet noted the strong support in France for the ECB's independence.
The ECB believes that controlling inflation and structural reform are the best ways to boost growth. But Mr Bini Smaghi made clear the limitations of exchange rate policy. An effective policy needed co-ordination between politicians and a central bank, and any action would have to be taken in concert with the US and Japan.
"Intervention is unlikely to have a lasting effect in the foreign exchange markets unless it is expected to be followed by domestic policy action, especially concerning interest rates," he said.
In contrast to the US and Japan, where the finance ministry sets the exchange rate regime and intervenes in exchange markets, eurozone central banks hold and manage foreign exchange reserves and have responsibility for any market intervention. Finance ministers can set "general orientations", which Mr Bini Smaghi argued would have to be agreed by the ECB, but have not exercised that right since the launch of the euro in 1999.
He said the current system had proved effective in 2000, the last time the ECB intervened, but institutional arrangements could still be improved. Problems were created when finance ministers clashed ahead of international meetings - with the public airing of differences undermining any subsequent agreement.
This had happened in February, ahead of a meeting of finance ministers from the Group of Seven industrialised countries. "Some euro area finance ministers expressed concern and dissatisfaction with the level of the euro exchange rate, especially vis-à-vis the yen, while other ministers indicated that the euro exchange rate was appropriate."
The political complexity of the EU weakened its ability to pursue its interests internationally, said Mr Bini Smaghi. But the agreement on an EU reform treaty, creating a "high representative of the Union for foreign affairs and security policy", showed progress was possible on political integration. In a clear hint at the ECB's preference, he asked: "Could this decision also represent a way forward in the field of the external representation of the euro area?"