FRANKFURT (MNI) – The recent depreciation of the euro is beginning
to cause some policy makers concern while others continue to welcome its
positive effect on the ailing Eurozone economy.

“A currency should always reflect the fundamentals of an economy
… sharp movements in a currency are undesirable for growth,” European
Central Bank Executive Board member Jose-Manuel Gonzalez-Paramo said
when asked about the euro’s recent drop on Thursday.

Also on Thursday, the Bundesbank for the first time voiced concern
over recent forex developments.

While the German central bank recognized that “the price
competitiveness of Eurozone suppliers vis-a-vis important trade partners
improved as a result of the euro depreciation,” it warned in its Monthly
Bulletin that “from a longer-term perspective [the euro's drop] is, all
in all, still not to be seen as completely favorable.”

The Bundesbank observed that the euro depreciation had exerted
upward inflationary pressures.

The comments follow remarks by euro group chief Jean-Claude
Juncker, who said earlier this month that he is “a little bit concerned
by the rapid fall of the exchange rate.”

Council member Ewald Nowotny, on the other hand, said Thursday that
the Eurozone can only benefit from the declining value of the euro.

“May I remind you that not a long time ago, there were concerns
that the appreciation of the euro would slow down the economy. This
[drop] is a clearly positive development, our industry certainly won’t
regard it as negative,” Nowotny said.

The euro has slumped just under 15% since the start of this year,
sparking speculation that the ECB could intervene in currency markets.

While concerns may be mounting among some policymakers, concerted
verbal intervention appears unlikely in the absence of a renewed sharp
drop.

“I don’t think this is a matter of immediate action,” Juncker said.

Even if some Council members may see the need to act, it may be
particularly hard to forge a consensus from these diverging assessments
in a field of long-held disagreements. Historically, Germany, for
instance has favored a stronger currency while Italy favored a softer
one.

Given low inflation levels, the slight upward pressure exerted by a
weak euro that the Bundesbank observed can currently not cause serious
concern. At the same time, the positive effects on weak Eurozone growth
are undeniable, weakening the arguments of those who worry about the
euro’s drop.

At its current level of around $1.24, the euro remains far above
its historical trough of around $0.82 and is still slightly higher that
the historical average of around $1.18.

In the meantime, the lack of a common stance on currency
developments is more likely to exacerbate uncertainty surrounding the
Eurozone and further weigh on the common currency.

Actual currency interventions by the ECB only occurred during the
period between September and November 2000, when the euro was below
parity with the dollar and never closed above the 80-cent range.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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