Less Fragile EMU = Stronger Euro
BNP Paribas | Apr 20, 2014 02:18AM ET
The euro is strong because it is in demand
This is the price of success for the European authorities and firstly the ECB
The European Central Bank (ECB) does not have a mandate to manage the exchange rate. Thus it was unusual to hear the ECB president react to euro fluctuations. Once again, Mario Draghi has shaken up conventions by indicating that a stronger euro would require “new adjustments to monetary policy”. He also added to fears, already expressed by others, that an overly strong euro could jeopardise the recovery. The ECB has devoted enormous efforts to stabilising the Economic and Monetary Union (EMU), and it is now facing the price of its own success.
The euro has been rising since the end of July 2012, which is precisely when Mr Draghi announced that he was prepared to do “all it takes” to preserve EMU. This was followed by the announcement of Outright Monetary Transactions (OMT) programme, which is designed to facilitate sovereign financing, causing a spectacular deflating of risk premiums. The euro’s appreciation, which has gained 10% against all currencies and 15% against the dollar since 18 months, is above all an expression of renewed confidence, and is closely linked to the return of foreign capital to the eurozone.
BY Jean-Luc PROUTAT
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