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Europe faces urgency over currency

Kai Ryssdal Nov 12, 2007

Europe faces urgency over currency

Kai Ryssdal Nov 12, 2007


KAI RYSSDAL: The realities of the foreign exchange markets mean somebody wins and somebody loses as currencies change relative values. The best example you can find of that right now is probably the Euro-Dollar conversion rate. The greenback got a bit of its own back today, but it’s been trading at record lows against the Euro for weeks now. That’s putting some pressure on Federal Reserve chief Ben Bernanke not to cut interest rates anymore. It’s also putting the squeeze on a guy named Jean Claude Trichet, Mr. Berrnanke’s opposite number at the European Central Bank. Stephen Beard covers all things European for us. Hello Stephen.


RYSSDAL: Stephen, what’s the dilemma that Mr. Trichet finds himself in with the rising Euro and the falling Dollar?

BEARD: The dilemma is that the falling Dollar makes it much more difficult for him to raise Euro interest rates, to curb Euro’s own inflation, which is rising at the moment. If Trichet and his colleagues do that, if they push up Euro interest rates, then it’ll push the Euro even higher against the dollar, and that’ll make life even tougher for Europe’s export industry.

RYSSDAL: Is it tough already? I mean are they having problems, European manufacturers?

BEARD: They are and it’s getting, getting more difficult. And it’s difficult for not just European companies that are exporting to the U.S. it’s a whole range of export markets that have been affected. Because as money’s been pulled out of the dollar it’s piled into the Euro. The Euro has risen against a range of different currencies.

RYSSDAL: Is there a political dimension to this story? You know the president of France was in town here. In Washington last week, warned about an economic war if the Bush administration doesn’t do something about the dollar and its sliding value, and those were his words by the way, “economic war.” What are we looking at?

BEARD: What Sarcozy was implying was that if the dollar decline continues, if American goods get cheaper and cheaper and swamp European markets, there’s a danger that European governments might resort to the kinds of protectionist measures that pitched the world into the Great Depression in the 1930s. Now interestingly, Sarcozy’s remarks, in front of that joint session of Congress last week, were aimed not just at the U.S. Fed but also to the European Central Bank back home. What he was saying was, don’t allow the Euro to keep on rising. Either cut Euro interest rates or intervene in the markets to keep the Euro down.

RYSSDAL: Well now let me ask you about that. I mean Jean Claude Trichet runs the European Central bank. Is it his decision, much the same way it is Ben Bernanke’s decision over here, on what to do about interest rates?

BEARD: Well it is. It’s a collegiate decision. He shares responsibility for this with five other members of the executive board of the Central Bank, as well as 13 Central Bank governors from the 13 member states. So they make the decision. He has the casting vote, but this is very difficult for Trichet in particular, getting political pressure from the likes of Sarcozy. The European Central Bank is a relatively young central bank. It doesn’t have the same power and authority as the Fed. In the year or two ahead, it’s quite clear that Trichet’s going to attract a lot more attention and he’s going to come under a lot more pressure. He is after all, unlike Mr. Bernanke, serving 13 different constituencies. He’s serving 13 different countries so it’s going to be very difficult for him, in a slow down, if some parts of the Euro’s own economy are buoyant while others are in recession. He’s going to be bombarded with conflicting demands. Those countries that are in recession will want lower interest rates. Those that are bouyant will want interest rates to remain the same.

RYSSDAL: Do you suppose they chit-chat the two of them, Bernanke and Mr. Trichet, and talk things over?

BEARD: Oh yes, absolutely. In fact Trichet said that he his, in quotes “an intimate relationship with Bernanke.” So yes, they talk regularly, they do confer, they compare notes on a very very regular basis

RYSSDAL: No such thing as anti-trust I suppose in global macro-economics

BEARD: No the do have a bit of a monopoly, don’t they? Anyway in their home markets.

RYSSDAL: From the Euro-zone our man in London Stephen Beard. Thank you Stephen.

BEARD: Okay Kai.

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