Bundesbank

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Bundesbank warns euro credibility is at stake May 24 2000

The Bundesbank has rejected recent suggestions that the euro's weakness may not matter much because it has helped exporters.

"The temporary competitive advantages from depreciation cannot in any case outweigh the possible damage to confidence," the German central bank said in a report on Wednesday.

It warned the 18-month-old euro was so undervalued on foreign exchange markets that its reputation was suffering.

The comments were seen, in particular, as an implicit rebuke of German chancellor Gerhard Schröder's remark two weeks ago that the euro's weakness was not a cause for concern but an opportunity for exporters.

The Bundesbank issued its report on the eve of Thursday's meeting of the European Central Bank, which must decide whether to raise interest rates for the fifth time since last November. Most analysts expect the ECB to hold its main refinancing rate steady at 3.75 per cent, but to make an increase next month.

The Bundesbank's comments were the latest expression of serious concern among euro-zone policymakers about the risks to public confidence in the currency. Euro notes and coins are to begin circulating in January 2002.

Wim Duisenberg, the ECB president, said three weeks ago in an unusual statement addressed directly to European citizens that people's savings and pensions would be safe in spite of the euro's low external exchange rate.

Three days later, the euro-zone's 11 finance ministers joined the European Commission and Mr Duisenberg in saying that they shared a common concern about the euro, whose weakness did not reflect the area's strong economic fundamentals.

The Bundesbank said that, against a weighted average of the currencies of the euro-zone's 13 most important trading partners, the euro had fallen by 14 per cent last year and another 7 per cent this year.

"Evidently, the currency markets are not sufficiently acknowledging the euro's internal strength," the Bundesbank said in its monthly bulletin for May. "Temporary over-reactions of this kind are nothing new on currency markets. Even in the D-Mark's history, there are examples of such an overshooting of the exchange rate. However, the present false valuations are not good for the young currency's reputation."

The Bundesbank said it regarded the euro as undervalued partly because euro-zone countries had made considerable progress in improving public finances, introducing tax reforms and liberalising labour, product and service markets.

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