Euro rise would aid ‘orderly’ global shift

The euro would have to rise in value from its current levels against the dollar by "at least" 10% to be worth $1.45 if the political leaders in the United States, Europe, Japan and China are to succeed in managing an orderly co-ordinated shift in economic policies to reduce destabilising imbalances in the world economy.

This is the conclusion of research released this week (27 March), based on work conducted by the Brussels economics think-tank Bruegel, the Petersen Institute for International Economics in Washington and the Korea Institute for International Economic Policy.

The research says that to halve the "unsust-ainable" US current account deficit ($857 billion in 2006) to 3% of gross domestic product, far-reaching changes in global exchange ratesare needed.

Although the euro could remain stable vis-à-vis the currencies of its major trading partners on average, substantial shifts against individual currencies are called for, in particular the rise in the euro against the dollar and an offsetting weakening of the euro against the Chinese renminbi and the Japanese yen. Were the unavoidable current account adjustments in the US, China and Japan to be disorderly, the exchange rate changes, including the fall of the dollar against the euro, would probably have to be much larger, potentially creating dangerous volatility in world financial markets.

Jean Pisani-Ferry, director of Bruegel, said that although orderly exchange rate changes led by policymakers would not call for any change in the trade-weighted euro exchange rate, the impact on individual euro-area countries and industrial sectors would vary. "Some industries and some countries would suffer more than others," he said. This could exacerbate economic tensions within the euro area.

The euro would have to rise in value from its current levels against the dollar by "at least" 10% to be worth $1.45 if the political leaders in the United States, Europe, Japan and China are to succeed in managing an orderly co-ordinated shift in economic policies to reduce destabilising imbalances in the world economy.