Luxembourg, 09/10/2007 (Agence Europe) - Concerns about current exchange rates are rising but the message being sent by Europeans remains timid. On Monday 8 October, the Eurogroup managed to decide on a position to be argued at the G7 summit in Washington on 19-21 October, drawing up a hierarchy of problems. Criticism of the dollar and yen is pretty mild, with ire focussing on the Chinese yuan. After a long debate on exchange rate policy, finance ministers in the eurozone again called on their G7 partners to revalue their currencies.
Exchange rates should reflect the economic fundamentals, and excess volatility of exchange rates is undesirable for economic growth, explains the Eurogroup's conclusions document. 'In emerging economies with large and growing current account surpluses, especially China, it is desirable that the effective exchange rates move so that the necessary adjustment will occur,' said Jean-Claude Juncker, President of Eurogroup, reading out the updated conclusions document to the media. He said he would be travelling to China before the end of the year with EU Economic and Monetary Affairs Commissioner Joaquin Almunia and President of the European Central Bank Jean-Claude Trichet, to discuss macroeconomic affairs with the Chinese.
The wording decided upon for the dollar does not really change much on previous versions and therefore does not reflect the concerns of various member states. 'We noted with great attention that the US authorities have reaffirmed that a strong dollar is in the interest of the USA,' comments the conclusions document. Juncker laid great stress on the words 'great attention' as he read it out.
Little was altered in the document concerning the yen: 'The Japanese economy is on a sustainable recovery path. This development should be recognised by market participants and be incorporated in the assessment of risks. Markets should be aware of the risks of one way bets.' Juncker added that reporters would have noticed the order of the three points addressed, with China coming first, followed by the dollar and then by the yen. He refused to make any further comments, even refusing to comment on exchange rates (although the Eurogroup ministers had discussed it).
Before the meeting, the German and Dutch finance ministers defended policies and made reassuring noises about the euro. Their ideas illustrated the differences in opinion in the eurozone where other countries, like France, are more likely to express concern and slam the weakness of the dollar. German Finance Minister Peer Steinbruck said, when he arrived in Luxembourg, that he preferred a strong euro to a weak euro, adding that he adored a strong euro. He was echoed by Dutch Finance Minister Wouter Bos, who welcomed the euro's current standing as matching its ambitions. The whole idea of monetary union was to have a strong euro and now that we have a strong euro, he said, he thought people should be happy. He added that he thought the growth forecasts remained strong.
Eurozone economy remains buoyant
Awaiting the upcoming European Commission forecasts, due to be published on 9 November, the situation regarding the eurozone has not changed. The impact of financial turbulence should not greatly impact on the eurozone economy in 2007 but risks for 2008 are building up (see EUROPE 9499 and 9516), concluded the Eurogroup. Growth should remain buoyant in the second half of 2007, said Juncker, stating that the economic fundamentals of the eurozone were healthy and growth would be to the order of 2.5% in 2007, slightly below forecast. The impact of the turmoil on the financial markets does not appear to be substantial, he said, saying it would be 'rather minor' but there were adverse risks for 2008. Commissioner Almunia agreed that the solid economic fundamentals should help dampen the current uncertainties. If there is lack of confidence on the markets and the credit crunch means that lending is tight, pay restraint seems to be occurring, company balance sheets are solid, and the overall environment is relatively favourable, he said.
France and Italy's budget plans not up to scratch
Against this uncertain backdrop, but with solid economic fundamentals, member states could do
better when it comes to correcting their public finance.
In the draft budgets submitted by several ministers to their counterparts on Monday, the adjustment trajectories do not always match the pledges made in April 2007 in Berlin. The average budget deficit of the eurozone countries is expected to be below 1% of GDP in 2007, but the result could be better, regretted Almunia, commenting that in 2008 pro-cyclical policies would still be applying in some member states. Some countries are still having excess budget proceedings applied to them (Italy and Portugal) and only six countries in the eurozone have met their mid-term target (MTT). Seven other eurozone countries have not managed to reach their MTT. Four eurozone countries (Germany, Austria, Malta and Slovenia) are respecting the structural adjustment trajectory laid down for them (improving the deficit by at least 0.5% a year). Three countries are not following the trajectory, namely France, Greece and Cyprus. The commissioner hammered home that they are expected to continue to make efforts due to the current favourable economic situation. He said the Eurogroup still had questions about the exact scale of economic growth, notably in France, and would be returning to this in January 2008.
Jean-Claude Juncker said the planned French finance law did not totally match the Eurogroup's expectations, repeating the Eurogroup's desire to see all eurozone countries achieve their MTT in 2010. The French budget situation was described by French Finance Minister Christine Lagarde on Monday evening in the light of the recently published French draft budget for 2008 (see EUROPE 9510), which is not fully satisfactory and makes reaching the 2010 deadline for reaching the MTT uncertain. Almunia said that for both 2007 and 2008, the Eurogroup's first estimates would suggest a deficit slightly higher than the figures put forward by the French government (France forecasts a deficit of 2.3% of GDP in 2008, compared with 2.4% in 2007).
Italy's deficit will be 2.4% of GDP in 2007, said Almunia, adding that Italy would probably correct its excess deficit by the end of the year. He commented, however, that if the extra income had not been used to boost spending this year, Italy's deficit would probably be 1% of GDP lower. For 2008, the deficit is forecast to stand at 2.2% of GDP, in other words a structural adjustment of only 0.2%, therefore postponing meeting the MTT until 2011, beyond the deadline set in April 2007. The European Commission is expecting Italy to come forward with other measures to enable it to meet the promises it made in Berlin.
The target of Greece, having a deficit of 1.7% in 2007, was described by the commissioner as ambitious. He said that Greece had agreed Eurostat's proposal to change the Greek GDP by 9.6% (the Greek authorities had suggested a bigger change). (ab)