Euro to challenge ‘neglect’ of dollar

Date: 12/12/1996

By Tim Jones

THE central banker charged with turning the euro from an ambitious project into a reality moved this week to counter fears that an undervalued US dollar will make a single currency bloc perpetually uncompetitive.

With only 15 months to go until the countries entering a monetary union are selected, French politicians are leading the way in voicing concern that they will be locking themselves into the euro-zone at an excessively strong exchange rate.

Former President Valéry Giscard d'Estaing has gone so far as to call for a devaluation of the franc before its rate is fixed forever, a demand which has been echoed by two members of the French central bank.

This has fuelled speculation that the pressure on an unprecedentedly unpopular French government to reduce unemployment has become so great that it is contemplating a relaxation of its decade-old franc fort policy to give exporters a better chance to compete once France is in the euro bloc.

But European Monetary Institute President Alexandre Lamfalussy believes these fears are unfounded. He argues that instead of locking countries into an uncompetitive exchange rate, the single currency will force the US authorities to end their “benign neglect” of the dollar on the international markets.

“We can and should be concerned about major movements in the dollar against the euro,” he said in an interview with European Voice shortly before this weekend's crucial Union summit in Dublin where he will unveil the design of the new euro banknotes.

“I believe that today, the dollar is probably still undervalued against major EU currencies, although the size of that undervaluation is open to debate.”

Collapses in the external value of the dollar have often been the catalyst for European currency crises, since they tend to boost the deutschemark against every other currency and also cause the price of the Union's exported goods to surge.

During the summer months, the dollar lost 4&percent; of its value against major European currencies and although it has revived since, EU policy-makers believe it still gives the Americans a competitive advantage.

Lamfalussy argues that the creation of the euro will help to end this threat, bringing the Americans to the Group of Seven's negotiating table in a way that the German, French, British or Italian governments alone cannot. “Why is it that the United States is so insensitive in this respect? I do not belong to those who believe that they deliberately want a weak dollar. What does exist is a lack of interest in the exchange rate,” he said.

This is partly because the US is such a huge and self-contained single market, and the source of much of its own raw materials, that a fall in the value of the dollar abroad has little impact on domestic inflation. The dollar is also the world's dominant currency for the pricing of traded goods and invoicing international customers.

Perhaps most importantly, the gigantic scale of the US securities market, its legal track record and the ease with which its shares and bonds can be traded and compared in terms of price and yield, make it highly attractive to investors, whatever happens to the dollar.

“In our countries, a weakening of the currency is likely to be accompanied by an increase in long-term interest rates,” said Lamfalussy.

“The Americans have experienced that once or twice in the post-war period, but not very often. The reason is very simple: there are no large-scale alternatives for investment in other areas.

“I think all this could change once we have a single currency. From that moment onwards, American insensitivity to the level of the dollar will change. This is why I believe that the kind of problems we have today will be more easily solved at that time.”