So here’s the good news. The overhyped threat of
“currency wars” is off the table for the time being after G-7 officials
said they won’t censure Japan over Prime Minister Shinzo Abe’s
go-for-growth strategy built around looser credit policy and a weaker
yen.
The bad news is that, if a currency war does break out, it’s most likely to be between France and Germany.
French President François Hollande has set the stage, with a Gallic mix
of pragmatism and panache, by admitting there’s little chance for France
to meet its growth and budget-deficit targets this year.
At the same time, he’s made clear — in a move soundly rebuffed by the
Berlin government, the European Central Bank and the Bundesbank — that
the euro’s
EURUSD
+0.01%
heady rise on the foreign exchanges needs to be brought under control.
The issues of growth and the exchange rate are linked. Germany is
projected to exceed France’s economic growth in 2013 for what will be
the seventh year out of the last eight, It ran a current-account surplus
of 6% of gross domestic product last year against a deficit of 2% for
France.
So the Germans can live with a euro above $1.30 (or maybe even $1.40) much easier than their western neighbors.
On the budgetary front, Jörg Asmussen, the former German finance
ministry state secretary who is now Germany’s man on the ECB’s
six-member executive board, fired a warning shot last week by calling on
France to stick to its plan to bring the budget deficit down to 3% of
GDP.
Only six weeks ago, Pierre Moscovici, the French finance minister,
solemnly pledged in a German newspaper article that 2013 would be a
“milestone” and a “year of progress” in which France would meet the 3%
goal.
Lower economic growth after the poor showing for the fourth quarter of
2012 — when the euro area contracted 0.6% after a 0.1% fall in GDP Q3 —
has put paid to French hopes,
France needn’t fear direct European repercussions, Paris will face
merely a polite rap across the knuckles. Olli Rehn, the EU’s monetary
commissioner, carefully signaled last week that countries such as France
and Spain may be given an extra year — until 2014 — to meet their
deficit targets if they can prove that they are making efforts in
structural reforms.
Psychologically and politically, though, the implications are more
severe. The episode badly weakens France’s negotiating hand as the euro
area heads for a choppy period in which the period of financial market
stability wrought by the ECB’s bond-buying pledge last summer may be
coming to an end. Optimists such as Jacek Rostowski, the Polish finance
minister, who bravely said in London last week that the euro crisis is
“effectively over,” are in the minority.
If Greece, Cyprus, Italy and Spain again make negative headlines in the
next few months, it will be much more difficult for France and Germany
to muster a common position on economic rigor in all these countries now
that Paris and Berlin are far apart in other elements of policy.
The French government is likely to draw encouragement from Japan. Abe
has had some early successes in his campaign to clip the wings of the
Bank of Japan to steer the Japanese economy out of years of deflation.
Yet Germany’s euro negotiating line may get tougher, not more generous,
as we approach the federal elections in September. Chancellor Angela
Merkel’s personal lead in the opinion polls looks far less likely than
many had earlier predicted to give her Christian Democrat party the
power to lead a new government this autumn.
Commentators and market analysts should heed one salient fact.
If the Social Democrats and their Green former coalition partners do
manage to return to power in Germany after September, they may be
slightly more accommodative on Europe than the present Berlin
government.
But Merkel’s Christian Democrats and their current coalition partner,
the Free Democrats, will be far more rigorous on euro bailouts than the
present SPD-led opposition — so, overall, Germany’s hard-line position
on the euro will likely get more stringent over the next 12 months.
In its almost ritualistically uncompromising stance on the euro, the
Frankfurt-based Bundesbank has been a lonely voice on the European stage
in the past two years. But now, just as other central banks like the
Bank of Japan are starting to lose their autonomy, the Bundesbank may be
coming back into vogue.
Probably it was a mistake to think that more than one big central bank
in the world could ever be properly independent. As George Orwell might
have put it, all central banks are independent, but some are more
independent than others. The Bundesbank, as ever, will be the last
institution standing firm.
There may be less of a gap between euro policies in Frankfurt and Berlin
in the next 12 months than over the past year. And, for governments
that miss their targets in Europe, this could spell troubling times
ahead.
Contact Us:
Asad Rasheed
Direct:04-3841906
Email:
asad@cfb.aeEmail:
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www.cfb.aeNews Source: www.bloomberg.com
