Europe’s biggest headache is suddenly the economic threat posed by the strengthening euro, a currency some analysts didn’t expect to survive into 2013.
The euro’s jump to the strongest in more than 10 months prompted Luxembourg Prime Minister Jean-Claude Juncker to warn yesterday that a “dangerously high” currency would make it harder to turn the economy around by raising export costs.
Debt-stricken southern Europe dragged the overall euro zone into recession in the third quarter of 2012. The malaise has reached Germany, with Chancellor Angela Merkel’s government today cutting its growth forecast for 2013 to 0.4 percent.
Juncker’s plea is unlikely to have “any lasting effect on the euro as long as the European Central Bank is not ready to accommodate any attempt to weaken the euro,” Copenhagen-based Danske Bank A/S (DANSKE) analysts led by Arne Rasmussen said in a research note today.
The euro averaged $1.2860 in 2012, dipping as low as $1.2061 on July 24 and rising as high as $1.3458 on Feb. 28. It approached that upper bound on Jan. 14, touching $1.3404. It bought $1.3273 at 2:30 p.m. Brussels time, down 0.3 percent.
ECB President Mario Draghi noted last week that the euro’s exchange rate is at its long-term average. ECB Executive Board member Peter Praet was quoted in La Libre Belgique today as calling the exchange rate “one variable to be factored in.”
The euro exchange rate is “not a major concern,” ECB council member Ewald Nowotny told reporters in Vienna today.
Juncker, who next week ends eight years of chairing euro finance meetings, became the first policy maker to label the export-crimping effect of the currency’s rise as a more pressing concern than the three-year debt crisis.
“It was said last year that the euro zone was at risk of breaking and I said last year that this won’t happen,” Juncker told business leaders in Luxembourg. “The euro zone has become more stable after lots of efforts, some from me.”
With Greece now drawing on a revised aid package and declines in borrowing costs providing a cushion for Spain and Italy, the European headlines have been dominated by concerns over growth and unemployment.
The ebbing of financial tensions in Europe, indications that an ECB interest-rate cut is off the near-term agenda, and speculation that Japan is seeking a weaker yen have contributed to the euro’s start-of-year advance.
A further rise in the euro is likely to wear down the ECB’s resistance to cutting its main policy rate from 0.75 percent, according to London-based Citigroup Inc. economists including Juergen Michels.
“Considering the importance of the exchange rate for growth and price stability, in our view a further strengthening of the euro will have an impact on ECB policy, probably as a factor for an interest-rate cut,” Citigroup said in an e-mailed note today.
Euro-area joblessness climbed to 11.8 percent in November, the highest since the euro’s debut in 1999. The average masked rates as low as 4.5 percent in Austria and as high as 26.6 percent in Spain.
“I don’t think the crisis is over,” Peter Bofinger, a member of the German government’s council of economic advisers, told Bloomberg Television yesterday. “On the financial markets, the situation has been stabilized, but this is not sufficient to stabilize the situation in the real economy.”
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