Sunday, September 23, 2007

Guaino on Euro

Henri Guaino, Sarko's chief speechwriter and alter ego, says that the euro is at an absurd level compared with the dollar and even more absurd compared with the yuan. "This can't go on," he says. "We can't just stand here with our arms folded." The high euro is ruining our efforts to improve our competitiveness and productivity.

As an American who has traveled in Europe recently, I have to agree that the euro feels absurdly high. Yet I've seen calculations by economists based on one set of hypotheses or another that suggest it isn't high enough. In any case, if France is determined to drive the euro down, it's time to move from "jawboning" to a more concrete proposal for how this might be done. The current French strategy seems to be to drop dark hints that it's all the fault of the European Central Bank. But how much does Sarkozy really think that a drop in the ECB rate of 1/4 or even 1/2 point would change the exchange rate? How does he propose to approach China on the subject? Would it be wise to encourage a more rapid diversification out of US government debt than is already under way, given the shaky state of the credit markets? The questions go on and on, and Sarkozy's posturing looks not so much like a "rupture" with traditional French policy as a continuation of the "blame Europe" approach to explaining why things are not right with France.

Jean-Claude Trichet will be on Le Grand Rendez-vous d'Europe1 today, and though I swore after last week's program that I would give this one a pass, I just may tune in for a response to Guaino. Trichet will also be coming to Harvard soon. It will be interesting to hear his views about Sarkozy.

3 comments:

Anonymous said...

When I first went to France in 1961, the "new franc" had just been introduced. As I recall, until it was replaced by the euro in 2002, it hovered around 5 to a dollar, with some occasional drops to as low as 7.5 or so, and occasional rises to as high as 4.5. An exchange rate of 1.40 euros to a dollar is equivalent to a rate of 4.69 francs to the dollar (1 euro = 6.6 francs)--so unless I am mistaken, the current rate is not that much higher than than the historical rate for the past half-century. Part of the sense of an enormously expensive euro is due to the simple fact that shortly after its introduction the euro dropped (in 2002) to a rate equivalent to 7.5 francs to the dollar (1.11 euros to a dollar). People (especially those of us who live in France on income in dollars) who enjoyed that brief windfall came to regard it as the normal case; it wasn't. --Or am I missing something here?

Unknown said...

Steve,
Thanks for your comment. Exchange rate determination is not a simple or uncontroversial subject, and I'm not about to tackle its complexities in a blog comment. Suffice it to say that a great deal has changed in the world since 1961. Trade flows are different; many economies are more open than they used to be; capital flows much more easily from country to country; European currencies have been unified and allowed to float against the rest of the world, rather than attempting to main a fixed peg against a standard currency. For all these reasons, "stability" no longer means holding to some "historical" mean (which might have made sense when the world was on a gold standard). Today there are various different ways of looking at what the "equilibrium" exchange rate between floating currencies might be: purchasing power parity, interest rate parity, portfolio analysis, trade balances, etc. Look, for instance, at this:
http://www.ryanpitylak.com/Ryan_Pitylak/papers/intl_exchangerate.htm
The literature is vast.

Anonymous said...

Thanks for the the very helpful reference. Having no training in this field, my interest is personal rather than macroeconomic; I tend to think in terms of whether I can afford to continue to live in France when the euro climbs over $1.50.