The Corner

One Size Still Not Fitting All

The Daily Telegraph’s Ambrose Evans-Pritchard returns to the subject of the strength of the euro against other currencies.

China’s central bank has been buying fistfuls of euros as it accumulates a world record $3.7 trillion in foreign reserves, and its motives are not entirely friendly. So have the central banks of Russia, Brazil and the Middle Eastern oil sheikhdoms, all aiming to cut reliance on the US dollar, part of a $9 trillion surge in reserves leaking, with tidal force, into the euro. In China’s case, it is deliberately driving down the yuan to capture export share. You could say China is exporting excess manufacturing capacity to Europe, or, in plain talk, exporting unemployment.

This is why the euro has long been too strong for its own good. It surged a further 9 per cent against the dollar from June to early October, before hitting the wall this week. It has risen 28 per cent against the Japanese yen in a year. This is a bizarre state of affairs for a currency bloc struggling out of recession. Weak prospects normally mean a weak currency, but there is nothing normal about Europe’s monetary union.

The euro exchange rate is far too high for two-thirds of the euro states, a key reason why unemployment hit an all-time peak of 12.2 per cent in September. It is pushing Europe’s crisis states into Thirties-style deflation, making it almost impossible for Italy, Spain and Portugal to dig their way out of debt….

But this, in particular, caught my eye:

A Deutsche Bank study said the euro “pain threshold” for Germany is $1.79. It is $1.24 for France, and $1.17 for Italy. It ended last week at $1.35 to the dollar. This means Germany is sitting pretty, and it dominates the policy machinery. Meanwhile, Italy screams with pain, its industrial output still 26 per cent below its 2008 peak. Italy’s EU commissioner, Antonio Tajani, warns of “a systemic industrial massacre”

One size still not fitting all. 

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