February 6, 2013 / 2:05 PM / in 5 years

UPDATE 2-Germany, France at odds on threat of euro strength

* Merkel spokesman says strong euro not a concern

* Signals opposition to French plans for target rate

By Madeline Chambers

BERLIN, Feb 6 (Reuters) - Germany said on Wednesday the strong euro was not a concern and signalled opposition to a French proposal for a mid-term target rate, exposing policy divisions over mainland Europe’s currency between its top two economies.

The comments from Berlin, where most politicians are firmly opposed to currency intervention, precede talks later in the day between Chancellor Angela Merkel and French President Francois Hollande.

Those talks, which will take place partly over a soccer match, may set the tone for an EU summit on Thursday which aims to secure a deal on the bloc’s long-term budget and a G20 summit in mid-February where global leaders are expected to discuss currency issues.

The focus of that debate is likely to be Japan, where a new monetary and fiscal policy drive has significantly weakened the yen.

“If you look at the historic context, the German government is of the view that the euro is not overvalued at the moment,” Merkel’s spokesman Steffen Seibert told a regular news conference, in unusually strong comments on exchange rates.

The euro firmed to $1.3535 from around $1.3506 after the remarks. Last week it peaked at $1.3711, its highest level since November 2011.

Mindful of the impact of a strengthening currency on the struggling French and euro zone economies, Paris has raised worries about the euro in the last few days.

On Tuesday Hollande proposed that the euro zone should agree on a “medium-term” exchange rate and act on global markets to protect its interests.

Hollande’s initiative reflects fears in some European countries, and within his own Socialist government, that a further rise in the euro could hit exporters and stifle the recovery France needs to improve its public finances.

Finance Minister Pierre Moscovici said on Wednesday that France would raise concerns about the euro’s strength at talks among euro zone finance ministers next Monday as well as at the G20 meeting

Moscovici said although there should be no pressure on the European Central Bank - which holds a policy meeting on Thursday - a discussion among European leaders about what might be a “fair level” for the euro was legitimate.


Merkel’s spokesman poured cold water on the idea.

“There will certainly be a conversation about that ... but the view of the German government is that exchange rate policy is not a suitable instrument to increase competitiveness,” Seibert said.

“You only achieve short-term impulses through targeted devaluation. A long-term strengthening of competitiveness is not achieved in that way.”

Seibert added that the recent rise in the euro followed a “massive” depreciation during the euro zone crisis and that it was a sign that investor confidence was returning.

“Our basic conviction is that exchange rates should reflect economic fundamental data,” said Seibert, adding that the G8 and G20 had agreed it was sensible for markets to determine exchange rates.

It is unusual for Merkel’s spokesman to be so outspoken about the euro exchange rate. Germany is traditionally against any attempt to intervene in currency markets and insists that the ECB must remain independent of political influence.

At the G20 talks in Moscow on Feb. 15-16, the world’s top economic powers are likely to discuss currencies, especially the weakening yen.

In an effort to end years of stagnation and deflation, the Bank of Japan announced last month that it would buy unlimited assets next year and double its inflation target.

This move has accelerated a fall in the value of the yen and triggered criticism from policymakers including Merkel and her Finance Minister, Wolfgang Schaeuble.

However, officials have said G20 leaders will probably not come out and call Japan’s action a competitive devaluation.

One G20 official has said the yen fall could also be seen as a result of its overvaluation in 2012, when investors sought alternatives to the euro because of concern about the future of the European common currency area.

Now that confidence in the euro was returning, money was flowing back out of the yen and into Europe.

A Reuters poll published earlier on Wednesday showed that leading foreign exchange forecasts do not expect the rejuvenated common currency to keep rising.

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