Riding the wave

Alister Bull

The Eurozone is not weighing FX intervention, according to the Greek Finance Minister. Alister Bull investigates

Eurozone finance ministers are not even thinking about intervention to stem the rise of their euro common currency, Greek Finance Minister George Alogoskoufis announced at the end of May, although markets could indeed be calmer.
"We don't like volatility and uncertainty or wild gyrations. We would have liked a more orderly exchange market, obviously," he told reporters in an interview.

"But the idea of intervention does not cross anybody's mind, really, because interventions have been shown in the past to be counter-productive," he said.

"It is a question, rather, of bringing macroeconomic policies in the world into line – that means Europe, the US, China, Japan – having a more coordinated response to the challenges that we face now, rather than anything else. It is not easy to do something directly on exchange rates," he said.

The euro has touched a series of record highs against a weakening dollar this year, as investors took fright over a US housing crisis that has chilled growth and forced the Federal Reserve to slash interest rates since September.
In contrast, the ECB, which sets interest rate policy for the common currency bloc, has kept rates on hold, thereby widening interest rate differentials between the dollar and the euro. It has even hinted that its concerns over inflation may force it to tighten monetary policy.

This hard-line stance has drawn complaints from some Euro zone politicians. But Mr Alogoskoufis said that these critics were in the minority and he stoutly defended the ECB's performance.

ECB support
"I feel that the vast majority of my colleagues feel the ECB is doing a very good job. Their job is to tackle inflation, to ensure financial stability, and they have responded appropriately," he said.

"I feel quite comfortable with what they're doing. I think they're doing a good job," he said.

The ECB has held rates at around four percent amid a global credit crunch sparked by the collapse of the US subprime mortgage market last August. The crisis has forced the Fed to lower its overnight benchmark federal funds rate 3.25 percentage points to two percent since mid-September.

Eurozone inflation slowed to a 3.3 percent annual rate in April compared with March's 3.6 percent record high. These figures are both well above the ECB's medium-term policy tolerance threshold of below, but close to, two percent.
"The main worry in Europe, as in the rest of the world, is about inflation. And it is not only oil. Food prices are causing a rise in inflation throughout the world," he said.

"It poses a future risk that we have to tackle early on because once inflation gets entrenched into expectations and the wage rounds it will become a much more serious problem."

Mr Alogoskoufis, a former economics professor and Greek finance minister since 2004, was in Washington DC for meetings with the heads of the World Bank and International Monetary Fund, as well US Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. He declined to comment about their discussions.

But he was upbeat on the chances that the common currency bloc would weather the fallout from high oil prices and slower world growth, and hoped it would meet a European Commission forecast for 1.7 percent economic growth this year.

"It is not a projection that can be seen as too optimistic. I think it is a realistic projection," he said.

"The assessment is that there is no reason to change this particular forecast, but we have to see how prices evolve and how the exchange rate of the euro evolves.

"One thing that one should keep in mind is that the oil price rise in terms of euros is much lower than it is in terms of dollars because of the appreciation of the euro so we don't get such a big oil shock because of the appreciation of the euro," he said.

As oil continues to set record highs this year, it inflicts significant terms of trade shock on dollar-based oil-importing economies, which must siphon off an even larger chunk of national income to cover their energy bills.