VIEWS FROM THE CAPITALS

Summer 2007

by Alan Dukes

Competitiveness concerns have re-opened Ireland’s debate about the role of the euro at home and abroad. Domestic discussions focus on the twin issues of the euro’s relative strength, which is making life difficult for exporters, and the recent eurozone interest rate hikes, which are whittling away the economic advantages that Ireland enjoyed from big rate reductions when the currency was first launched.

The Irish are also considering some of the wider questions that still have to be answered about the euro’s future. For instance, how will the European Central Bank (ECB) cope if global economic imbalances spark another roller-coaster ride for the world’s foreign exchange markets? Should inflation remain the over-arching focus of ECB management in the eurozone? And should non-eurozone EU countries which ultimately hope to join the single currency play any role in political decision-making that affects the euro?

To many observers, the euro still appears an unprecedented creation. For the first time in history, 15 countries designed a new joint monetary system and 12 nations signed up at the outset, joined recently by Slovenia. Half of the remaining 14 EU member states are tracking the euro in the Exchange Rate Mechanism II in anticipation of becoming members of the eurozone. Today, however, the shock of the new has worn off and many of the outstanding questions relate to the mundane business of managing the system properly.

Managing the euro on the foreign exchange markets is, of course, helped by past experience with national currencies. Economic fundamentals provide a clear guide to the circumstances that can be expected to push the euro up or down against the dollar, sterling or yen. Eurozone countries can also look to the example of other vast and socio-economically diverse regions of the world that have been managing a single currency for centuries, such as the US, Russia, China and Brazil. Broadly speaking, the euro can be expected to behave like any other currency. Nevertheless, both the euro and the ECB remain relatively young and inexperienced institutions. We can only hope that the European Central Bank will be able to smooth out extreme euro fluctuations in any troubled and turbulent times ahead.
Another recurring debate in the eurozone is the suitability of the ECB’s primary objective of maintaining price stability, regardless of broader concerns about overall economic growth and employment. The ECB is adamant that inflation will remain its central concern. However, it could be argued that the sheer variety of economic and fiscal conditions in the eurozone makes the ECB’s approach particularly prone to being out of tune with the wider economic demands of the people it is meant to serve.

Another aspect of the European monetary system that may need reviewing is the role of the Eurogroup, which groups the 13 finance ministers of the eurozone countries and liaises with the ECB and the EU’s Ecofin Council. Decisions taken within the Eurogroup are of great importance to the remaining 14 EU members, especially those that aspire to join the euro. It may now be time to consider whether it is wise to exclude from strategic decisions about the management of the system member states that are working towards eurozone membership.