European politicians complain euro over-valued

May 11, 2007

There is an intriguing article in this morning`s Le Monde pointing out that Nicholas Sarkozy, to his credit, continues to have misgivings about the behaviour of the European central bank, its policy of high interest rates and the resulting over-valuation of the euro . The euro this morning is trading at $1.3524 US.
Too high an exchange rate for the euro dampens European exports including sales of the Airbus aircraft. Excessively high interest rates also Sarkozy correctly points out slows economic growth and prolongs high unemployment. Sarkozy`s critique which is a welcome alternative policy to wage cutting strategies is supported by other European politicians.

The problem is the stubborn refusal of the independent central bank to listen to the criticism and change its hard line monetarist ways. Instead they remain concerned with money supply growth and inflation.

Lets hope that President elect Sarkozy will continue to devote some of his political capital to pressuring the bank to change its ways and build an anti-monetarist alliance in Europe that might eventually lead to a much needed reform of the Bank`s mandate.

By all means continue in a consensual manner to modernize and refine job search techniques but do it in the context of a supportive monetary and fiscal policy. Such an approach is most likely to succeed and produce a wealthier and more fully employed Europe.

Yesterday the stock market dropped sharply on Wall street with the announcement of slower growth and sales than had been expected. This came after the US Fed kept interest rates on hold and indicated that it still saw the risk of inflation. The Bank of England increased rates by 25 basis points and the European central bank renewed its anti-inflationary bias. The markets drew their conclusion.

The Canadian dollar dropped to below 90 cents US on the news that job growth was less than expected. The unemployment rate is 6.1 % but some 5600 fewer jobs than expected were created and the participation rate declined in Quebec and Ontario.Ontario unemployment was 6.6 % and Québec 7.2. The western provinces continue to boom with unemployment at or below 4 % as the resources boom continues to drive their economies.

The growth slowdown in Ontario is likely to mean that the Bank of Canada will not raise rates, hence the flight of speculators from the dollar