Tensions Building ...

2005-09-13T065756Z_01_NOOTR_RTRIDSP_2_OFRBS-FRANCE-PRIX-DETAIL-BS-20050913.jpgThis was of course only expected and although I fully agree with those who assert that the Eurozone finance ministers have no business telling the ECB what to do it is clear that the political pressure will only grow bigger for every raise coming out Frankfurt at this point as it will probably mean an increasing interest differential as the Fed probably holds next time around and consequently the Euro will continue to drift upwards.

(From the FT)

France on Monday led European concern over the rising euro in an apparent attempt to put pressure on the European Central Bank not to jeopardise eurozone growth prospects ahead of next year’s French presidential election.

Thierry Breton, France’s finance minister, urged “collective vigilance” in the face of the falling US dollar. He promised to raise the euro’s recent rally with fellow eurozone finance ministers at their monthly meeting in Brussels on Monday night.In spite of recent foreign currency movements, the ECB is expected to press ahead with another quarter-point rise in its main interest rate to 3.5 per cent next week. But, if sustained, the euro’s appreciation could curb the scope for further rises in borrowing costs in 2007. Mr Breton’s initiative may have been aimed at setting the tone in the debate on monetary policy action beyond the December 7 ECB meeting.

Ernest-Antoine Seillière, president of Unice, the European employers’ organisation, also said the ECB and eurozone finance ministers should be “more concerned about currency developments” and that the ECB should put interest rate increases on hold.

However, Jean-Claude Juncker, Luxembourg prime minister and political head of the eurozone, played down fears about the impact of the rising euro on exporters. “I don’t think we have to be concerned now,” he said. “We are lengths away from the critical zone.”

Mr Juncker believes the eurozone economy’s revival is robust enough to survive a rise in the exchange rate and says he was more concerned when the euro was so weak that it was trading below parity with the dollar.

In recent months, Mr Juncker has tried to restrain fellow ministers from making implicit criticisms of the ECB’s interest rate policy, which he fears are counterproductive.

However, his colleagues around the table are less phlegmatic, particularly those from countries such as Spain, with industries struggling to maintain competitiveness on world markets.

It is clear that we are facing governance problems here. Politicians and leaders of cross-European organizations are firing cheap shots at the ECB at the moment. The thing is that the this will only force the ECB to raise in December in order to remain credible towards markets which in essence is ok. However, a raise in December was always going to be the wrong decision in my opinion but now I am afraid we are locked in. The ECB of course is really caught between a rock and a hard place here and no matter what it does it will face criticism ... I think that we will see a raise but there are obviously also mounting pressure for a hold. In the longer term I am pretty certain in my predictions though that the ECB won't be able to widen the interest rate differential much in 2007 as many commentators are suggesting.

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