DON'T JUST STAND THERE...BLAME SOMEBODY

Euro a scapegoat for all ills of Europe (ALBERTO ALESINA and FRANCESCO GIAVAZZI, MAY 22, 2003, Straits Times)

THREE years ago, the European single currency, the euro, was born at an exchange rate of 1:US$1.17, which presumably was deemed to reflect appropriately price levels on both sides of the Atlantic at that time.

The euro's exchange rate has since endured a roller-coaster ride. Now, it has returned to almost exactly its opening level. So why is the European business community claiming that the 'super euro' is bringing calamity down upon their heads?

The answer is that blaming the euro is an easy way to deflect attention from the true cause of Europe's economic malaise: a surprisingly low level of productivity per capita.

Europe's low productivity reflects a simple statistical fact that fatally undermines relatively high productivity per hours worked: weak participation in the active labour force means that Europeans work a very low number of hours. [...]

Central bank intervention in the currency market is merely destabilising, and therefore counter-productive. The ECB was right to ignore the exchange rate when it fell to US$0.80, and it is right to ignore it today when it is close to US$1.20.

Most economists believe that central banks should target only inflation, which means cutting interest rates only when the economy slows down and inflation falls - which is precisely what the ECB has been doing.

The bottom line is that Europeans should worry and talk less about the euro exchange rate, and spend the time they save trying to address their real problems: low productivity, market rigidities, fiscal policies constrained by the Stability Pact, and bankrupt pension systems.

You know, some people must be surprised when the sun rises every day. Posted by Orrin Judd at May 21, 2003 10:53 PM