Euro Reflections.

• Author: Issing, Otmar
• Position: Interview with Otmar Issing - Interview

A TIE exclusive interview with the ECB's Otmar Issing.

TIE: The euro's relative weakness against the dollar has been a bit of a mystery. For many, the euro's performance in the short run is hard to understand, in terms both of interest differentials and of growth differentials as well. It almost seems as if when there is good news about Europe, the euro weakens, and when there is bad news about the United States, the euro weakens. What is your take on the euro's performance to date? Where do you see things going from here?

OI: It is true that the weakness of the euro is puzzling when one gauges it against fundamental economic facts and economic reasoning. The external value of the euro does not currently reflect its internal stability.

Looking at the internal value of the euro, one has to recognize that we have managed to keep inflation under control despite the price pressures caused by the past sharp rise in oil prices, and more recently by the outbreak of foot and mouth disease and other food hygiene concerns affecting the price of food in Europe. I think we can say that we are on track to achieve our objective of medium-term price stability, and this is reflected in low inflation expectations in the euro area, both over the medium and long term. It is also a fact that the real growth rate of the euro area currently exceeds that of the United States. Not only that--according to projections by the main institutions, real growth in the euro area will continue to outpace growth not only in the United States, but also in Japan and other major countries in 2001.

When one takes into consideration this better outlook for growth and the expectations of price stability in the euro area, I think one can safely say that the odds are currently clearly in favor of a stronger euro, because over time the internal solidity and stability of a currency should be reflected in its external value.

TIE: In a related question, some observers tie the euro's weakness directly to the fact that the largest country in Europe--Germany--is quickly becoming the sick man of Europe. By that they are not referring merely to cyclical macroeconomic weakness, but more to fundamental structural weakness within the economic and political system. The view is that the Schroeder government enjoyed a strong beginning, quickly enacting impressive tax reforms. Since then, however, the goal of achieving structural reform has faced one failure after another. Pension reform is a disappointment. The labor market reforms being called for by the government, including co-determination proposals, are reminiscent of the left-wing policies of the late 1960's. Is Germany (and perhaps also Italy) quickly becoming the anchor holding back the euro's ability to strengthen against the dollar?

OI: I should like to point out that the ECB...