In the monetary and financial field, the week coming to a close has not brought any overwhelming changes but confirmation that a number of areas have been coming into focus. Those amongst us who love all that is sensational will perhaps be disappointed but reason gradually prevails over strong emotions and the taste for scandal. And in my opinion, this is much better. I still consider valid the considerations set out in this column just one week ago concerning: a) the unanimity, finally achieved, against excess and abuse in the world of finance, which has been tolerated far too long; b) the growing support with regard to the Eurogroup's strengthened policy; and c) the foreseeable slowdown in the United States and the EU of imports of some products “made in China”. This week, the meeting of the Eurogroup and the Ecofin Council, as well as the declarations by the president of the European Central Bank (ECB) warrant two more considerations:
1. The monetary “crisis” is reasonably under control and could even prove positive. Jean-Claude Juncker, Eurogroup President, summarised the situation in two points: the impact of the summer's financial turbulence will not seriously affect the economy of the eurozone in 2007; and this impact may be slightly higher in 2008 but the fundamental data of the eurozone will remain sound. According to Commissioner Joaquin Almunia, company balance sheets are sound, wage inflation is under control, and the global environment is relatively favourable. I would add that banks are beginning to clarify their losses, which are sometimes considerable, but they can overcome this problem - after all, they did earn a lot before it happened.
In exchange for the (moderate) slowdown and the difficulties (for some), the functioning of the financial markets will be radically improved and there will be an end to unacceptable abuse. At least that is what the authorities intend. The “roadmap” approved on Tuesday by the Ecofin Council covers the various aspects of improvement: transparency, better risk management, heightened supervision, and evaluation of the role of the rating agencies in the classification of “complex financial instruments”.
Speaking before the relevant committee at the European Parliament, Jean-Claude Trichet cited the same measures for restoring market confidence: transparency, risk management, the evaluation of the role of rating agencies, and the analysis of uncontrolled financial instruments (including hedge funds).
Although a large part of the press continued to announce endless disaster, I was perhaps not wrong early September when I gave as the title for my comments in bulletin No 9495: “Crisis or salutary clean-up of financial markets?”
2. Going beyond rhetoric about the dollar, and recognising real priorities. The Eurogroup has not left itself be dragged into facile rhetoric about exchange rates, that of the dollar in particular. For a better global monetary balance, the priority is reduction of the trade and budgetary deficit in the United States. No improvement is possible if the dollars (or American Treasury Bonds) held abroad continue to swell in a senseless manner. The value of the dollar can only go up if this improvement is made and this means a reduction in American imports, which requires among other things the rise in value of other currencies, especially the Chinese and Japanese currencies. The euro has already done its duty from this point of view. The three persons at the institutional direction for the euro (Mr Juncker, Mr Almunia and Mr Trichet) will be in China together by the end of the year - which is unheard of.
Commenting on the “conclusions” reached by the Eurogroup, Jean-Claude Juncker had told journalists: “You will have noted that the three points tackled by us were first of all the yuan, then the dollar, then the Japanese yen” (see Albin Birger's account in our bulletin No. 9519). The official conclusions of the Eurogroup are, moreover, explicit: in the emerging economies which are experiencing major and growing current account surpluses, especially China, the real exchange rates must evolve so that the necessary adjustments can intervene. We know, moreover, that other currencies have remained stable compared to the euro, and some have even been re-valued.
These true priorities should be recognised in Paris, as well as within the European Parliament where too many parliamentarians give way to rhetoric consisting of condemning the over-strong euro and calling for an urgent rise in the dollar, neglecting the fact that, in order to achieve the latter, this would necessarily mean rectifying the American balance of payments, including reduction of certain US spending abroad. (F.R.)