Dollar woes blow wind of change towards Frankfurt

While European Union leaders swigged champagne in Lisbon last week (19 October) after agreeing the terms of the reform treaty, the mood in Frankfurt was anything but euphoric.

Back in August, Jean-Claude Trichet, the president of the European Central Bank (ECB), sent a little remarked-upon letter to the Portuguese government as holder of the presidency of the EU. It detailed what, to the casual observer, might have appeared to be a few quibbles about the new wording of the proposed treaty, whose first draft had been published on 23 July.

The letter pointed out that, unexpectedly, the draft appeared to change slightly the constitutional status of the ECB. It included the ECB in the general list of EU institutions, rather than describing it as one of the "other Union institutions", as had been expected. So what?

Earlier this month Deutsche Bank published an analysis of the implications of the treaty reform for the single currency’s monetary policy. It argued that the new wording could be construed as changing the ECB status, making it more like other EU bodies, such as the Commission, which can be required to co-operate with other European institutions in pursuit of common EU targets. So, for the ECB, the reform treaty can be seen as eroding slightly its independence.

The German Bundesbank, the central bank model for the ECB, could rely upon the support of the German people for its independence. The ECB, operating in a diverse multinational environment, has no such culturally uniform body politic to back it up. So, quite rightly, it takes even apparently minor changes to its vital legal status very seriously.

The reform treaty will also beef up slightly the role of the Eurogroup of finance ministers of the eurozone. The Eurogroup will be mentioned for the first time in the treaty and the election of the president of the Eurogroup will be formalised. This move, however, only confirms current practice.

Another formal change proposed in the reform treaty is an enhancement of the Eurogroup’s role in the process by which member states can join the single currency. Whether more direct Eurogroup involvement will fundamentally influence euro membership decisions is debatable. But, again, the change would further enhance the status of the Eurogroup.

The proposed reform treaty also calls on Ecofin, the Council of EU finance ministers, to formulate common positions within international financial institutions such as the International Monetary Fund and the G7 of the world’s leading economies to promote unified global representation of the EU. If the EU is going to punch its diplomatic weight in world financial affairs, as it must, more cohesion among EU, especially eurozone, finance ministers is certainly needed.

So, the more one looks at the proposed reform treaty the more one sees a series of steps, which ever so slightly enhance the status of finance ministers and the Eurogroup, vis-à-vis the ECB.

In one field, the single currency’s exchange rate policy, the wind of change is blowing even more strongly in finance ministers’ favour, albeit not because of any specific new treaty proposals.

Currency experts such as Fred Bergsten, the former senior US Treasury official who is now director of Washington’s Peterson Institute for International Economics, is warning that, even with the single currency hitting new highs this week, the US dollar still has much further to fall. On average by a further 15-20% he says, and mostly against the euro if Asian currencies do not revalue. So no surprise then that Europe’s finance ministers are united in their desire, signalled at last week’s G7 finance ministers’ meeting, to put pressure on China to revalue the yuan.

In the United States, the Treasury and the central bank, the Federal Reserve Board, share an uneasy joint policymaking role for the foreign exchange value of the US dollar. So too in euroland, exchange-rate policy responsibility is split, uncomfortably but necessarily, between the supposed technocrats of the ECB and the EU’s elected finance ministers.

Today EU growth is slowing and current account deficits and worries about international export price competitiveness are already troubling countries such as France and Italy, long before the euro exchange rate has risen to the $1.70 level Bergsten is talking about. So the more active involvement of finance ministers in foreign exchange policy, by, for example trying to press the ECB to lower interest rates in order to try to halt the euro’s rise, is bound to happen.

Fortunately Germany, which knows a thing or two about the value of a hard currency, is running a big current account surplus and its economy is strong and internationally competitive. So the ECB has a powerful ally on hand which will support the priority it gives to fighting inflation. The way events are shaping up, the ECB is going to need as many allies as it can muster.

• Stewart Fleming is a freelance journalist based in Brussels.

While European Union leaders swigged champagne in Lisbon last week (19 October) after agreeing the terms of the reform treaty, the mood in Frankfurt was anything but euphoric.

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