Business calls for euro action

Tony Barber and Ralph Atkins
Financial Times
Thursday October 04, 2007

European big business on Wednesday joined the growing number of eurozone politicians demanding rapid action to halt the euro’s rise against the dollar and other currencies.

Having crossed $1.40 against the US dollar and appreciated against the Chinese renminbi and Japanese yen, “the euro exchange rate has attained a pain threshold for European companies”, said Ernest-Antoine Seillière, president of BusinessEurope, the pan-European employers’ association.

Eurozone leaders want to make exchange rates a central theme of discussion when finance ministers and central bankers of the Group of Seven countries meet in Washington on October 20-22. They hope to persuade Canada, Japan, the UK and US that the global credit crisis has amplified the risks of disorderly exchange rate movements.

Mr Seillière’s warning, contained in a letter to Jean-Claude Juncker, chairman of the eurozone finance ministers’ group, pointed to mounting concern about the euro’s rise among European business leaders, whose reaction had until now been relatively muted.

The European Central Bank meets on Thursday in Vienna to set interest rates. Jean-Claude Trichet, ECB president, has moved closer towards intervention in recent days by stressing Washington’s interest in a strong dollar.

Romano Prodi, Italy’s premier, said he had spoken by telephone on Monday with Angela Merkel, Germany’s chancellor, about the euro’s strength. “There is concern that US policy is very attentive exclusively towards domestic interests,” Mr Prodi said.

But the impact of the euro’s strength on exports is described as relatively small in an analysis prepared for a eurozone finance ministers’ meeting in Luxembourg next Monday.

According to the document, seen by the Financial Times, the euro’s appreciation from 2001 to 2006 reduced eurozone exports by only 0.8 percentage points a year, an effect far outstripped by buoyant world demand, which added 6 percentage points to annual eurozone export growth.

Eurozone countries where domestic rigidities have driven down cost competitiveness also have the weakest export performance.

“Other factors – including in particular foreign demand – play a more important role,” the analysis says.

The ECB is expected to leave its main interest rate unchanged at 4 per cent. Although inflation is rising, the stronger euro and higher financing costs after the global credit squeeze have removed the need for more rate increases.

The eurozone’s vulnerability to the credit squeeze was highlighted on Wednesday by service sector purchasing managers’ indices showing a fall in growth in September, led by the financial services sector.

Similar indices for eurozone manufacturing, released on Monday, suggested the stronger euro was already having an impact, with new export orders growing at the slowest pace since August 2005.