Explaining the strong Euro

31 Oct

As Europe’s sovereign debt crisis rages on, it is easy to forget about the Euro. In the midst of the crisis, the currency itself is holding up remarkably well. Andrew Watt,  over at Social Europe, has asked how it is possible that the currency – which many are predicting will soon disappear under the pressure of its own internal contradictions – is actually comparatively strong. He noted that the currencies weakened most by the crisis are the US dollar and the UK pound. The Eurozone’s sovereign debt problems have affected the value of the Euro but mainly in a way that has seen it depreciate against “safe haven” currencies such as the Swiss Franc. It has not so far depreciated significantly against the pound or the dollar. This may change, given the impact of the ECB’s decision over a year ago to start buying up the government bonds of countries like Greece. Deutsche Bank predicts that against the dollar the Euro will over the next 12 months depreciate from 1.38 $ per Euro to 1.25 $/Euro. Significant as that may be, it is also noteworthy for the EU’s current starting point, which is relatively strong against the dollar.

Watt correctly pointed to the European Central Bank as key to the Euro’s movements. One big difference between the Bank of England and the Federal Reserve in the US and the ECB in Frankfurt has been the practice of quantitative easing by the British and US central banks. One intention behind printing money is to depreciate the currency (by putting more dollars and pounds in circulation) and thus stimulate exports. The UK pound lost 1% of its value against the Euro after Mervyn King, director of the Bank of England, announced another 75 billion pounds of quantitative easing.

There is another way of looking at this same issue. A feature of the ECB is its peculiar exposure to political pressures. In some respects, it seems entirely immune from any such pressure. The ECB has maintained its hawkish policy on inflation, raising rates when all other comparable economies are cutting theirs. In 2011, the ECB has raised interest rates twice. With rates relatively higher in Europe, the pressure upwards on the Euro is maintained. It may seem absurd that as the Eurozone as whole struggles to avoid recession the outgoing ECB director congratulates himself on keeping inflation low. Trichet, in an article in Die Spiegel, earlier this year, was dubbed “the German Frenchman”. Over on the FT’s Alphaville blog, much is made of the ECB’s insulation from political pressures. As Joseph Cotterill quite rightly notes, the ECB is not here to save the world. Those expecting the ECB to transform itself into the Eurozone’s political saviour will be disappointed.

But to say that the ECB is entirely insulated from political pressure is wrong. Rather, its exposure to such pressures is selective. The decision by Trichet in May 2010 to start buying up the sovereign bonds of embattled European economies prompted the departure of then German board member and head of the German Bundesbank, Axel Weber. This decision, which saw the ECB go beyond the terms of its mandate, was widely seen as evidence of French pressure. The ECB’s role is thus far from politically neutral. Its actions reflect the specific configuration of the European Union’s supposedly supranational institutions. Formally independent from member states, these institutions are heavily shaped by the outlooks and preferences of national executives and national officials. At the same time, they are very far removed from events on the ground and from the concrete interests of majorities within EU member states. The ECB’s actions reflect the varied interests of Europe’s governments but not those of its people.

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