24th Oct 2016

Germany shoots down Hollande's exchange rate plea

The German government has moved quickly to shoot down a plea by French President Francois Hollande for the EU to agree measures to control the euro's exchange rate.

Government spokesman, Steffen Seibert, said Wednesday (6 February) that Angela Merkel's administration would not support a move away from the euro's floating exchange rate.

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  • Most currencies have had floating exchange rates since the collapse of the Bretton Woods agreement in 1971 (Photo: aranjuez1404)

"We are convinced that exchange rates reflect the economic fundamentals, especially flexible ones. We are open to a discussion with France about it, but the German government doesn't think that an exchange rate policy is an appropriate instrument to boost competitiveness. It may set some short-term impulses, but nothing sustainable," he said.

He added that Hollande is likely to bring the topic up during his dinner with Merkel in Paris on Wednesday night, but noted that most of the discussions would revolve around the EU budget.

Speaking in the European Parliament on Tuesday (5 February), Hollande told MEPs that EU leaders "need to think about our currency the euro. We must have an exchange rate policy otherwise it will have rates that do not reflect the strength of its economy."

Hollande said he wasn't calling on the European Central Bank to set an objective for the value of the euro, but for change in the way the international monetary system works.

"We should begin the necessary reform of the international monetary system," he said. "Otherwise we are asking countries to make efforts on competitiveness that are annihilated by the value of the euro."

Under the EU treaties, the ECB is solely responsible for the euro's exchange rate policy and has taken a strict 'hands off' approach. Governments can give 'general orientations' on exchange rate policies on condition that these must not interfere with the ECB's mandate.

However, the treaties do leave an exemption allowing governments to "conclude formal agreements on an exchange-rate system for the euro in relation to the currencies of third States.

Meanwhile, ING Financial Markets economist Carsten Brzeski dismissed the remarks as an attempt by Paris to pile pressure on the ECB.

"Part of every French president's brief is to attack ECB independence". he said, adding that "the treaties are very clear that member states can't interfere with the ECB's mandate." 

"This implicitly puts pressure to ECB to do something, either through quantitative easing or by cutting interest rates. But they're not going to do it."

Critics have also suggested that Hollande's statements were an attempt to deflect attention from the country's economic struggles.

"It is also an illustration of the fact France didn't do their domestic homework and is struggling to be economically competitive," commented Brzeski.

After suffering heavy falls against the dollar and sterling in 2011 and 2012 at the height of the eurozone crisis, the euro has begun 2013 strongly, reaching a fourteen month peak against the dollar. While this makes imports from outside the EU cheaper, it also increases the price of exports, making it harder for the likes of France and Germany to export their way out of recession.

Most currencies have had floating exchange rates which fluctuate according to the financial markets since the collapse of the Bretton Woods agreement in 1971, which had seen most countries peg their currency against the US dollar and tailor their monetary policies accordingly.

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