Posted 4:44 AM by Dil
Euro steadies ahead of ECB rate decision
By Gordon Smith
Published: December 4 2003 11:04 | Last Updated: December 4 2003 12:21


The recent rally that has pushed the euro to record highs against the dollar ground to a halt on Thursday as caution set in ahead of the interest rate decision from the ECB.


The single currency crept back above the session lows by midday in London after falling half a cent in Asian trade. A report in the Daily Telegraph suggesting the European Commission was planning measures to limit the single currency's rise, halted euro's recent rise to lifetime highs.

The report suggested that Pedro Solbes, EU Commissioner for Economic and Monetary Affairs, had commissioned a report to study whether Brussels could legally impose "quantitive restrictions" on capital inflows into the eurozone.

But the euro selling eased after analysts dismissed the reports as "spurious" and the European Commission called the claims "completely groundless". By midday in London the euro stood at $1.2063 above the $1.2050 level tested in the Asian session.

"We believe any moves [currency controls] would be a step back to the 1970s and we don’t believe the EU will take these draconian measures," said Paul Robson, a strategist a Bank One.

"The ECB will take a three-step approach to limiting euro gains. First, it will talk about the effects of a strong euro on exports and the eurozone recovery. Second, interest rate cuts will be back on the aganda to stimulate demand and only after these two measure have been taken would the EC consider using currency control measures to stem the rise of the euro."

Mr Robson suggested European policy makers would grow nervous if the euro reached the $1.25 level but said it was the speed of the rise rather than the rise itself that worried officials. His 12-month target for the single currency is $1.30.

The single currency closed at $1.2108 against the greenback in New York on Wednesday after hitting a new record high of $1.2128 in European trade. The fragile eurzone recovery has been put in doubt by an increase of more than 20 per cent for the euro against the dollar in the past twelve months.

After the initial flurry trade slowed as investors waited for an interest rate decision from the European Central Bank due at 1245 GMT. The central bank is expected to leave its main refinancing rate unchanged for a sixth month at 2 per cent.

Traders said investors were also cautious ahead of key employment data from the US on Friday. The monthly non-farm payrolls figure is expected to show first-time unemployment claims continue to fall. Later on Thursday the weekly jobless figures are expected to confirm that the US economy is continuing to create jobs.

Sterling weakened against the dollar after the Bank of England decided to leave its key lending rate unchanged at 3.75 per cent. Shortly after the decision the pound stood at $1.7218 against the dollar after closing at $1.7244 on Wednesday.

Sterling hit a five-year high against the dollar in the previous session as figures showing US productivity grew at its quickest rate for 20 years failed to stem the decline of the greenback.

Posted 4:22 AM by Dil
Brussels considers imposing currency controls
By Ambrose Evans-Pritchard in Brussels (Filed: 04/12/2003)

The European Commission is examining the legal basis for 1970s-style exchange controls to stop the euro surging to destructive levels.

A team working for Pedro Solbes, economics commissioner, claims Brussels may lawfully impose "quantitative restrictions" on capital inflows, clearing the way for a crisis response if the dollar continues to fall.

The document, drafted last month on the orders of Mr Solbes's director-general, Klaus Regling, concludes: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months."

Any decision would be taken by EU finance ministers under qualified majority voting, leaving Britain with no veto.

The move came as the euro hit highs against the US dollar, touching 1.2125 yesterday before closing at 1.2109. It has gained 42pc in less than two years.

The euro-zone has borne the brunt of the global realignment. The Chinese yuan is pegged to the dollar, while Japan has capped the yen by buying US bonds.

Industry leaders in Germany and France say the euro has crossed the "pain threshold" and risks aborting the euro-zone's fragile recovery. The latest survey data shows a renewed fall in confidence among French consumers and German retailers.

Jean-Philippe Cotis, the OECD's chief economist, said further appreciation posed a "great danger" to the euro-zone.

It is widely assumed EU law guarantees the free movement of capital but, after combing through the treaties and court judgments, EU experts have concluded that this "absolute freedom" can be limited in an emergency.

"Among the actions that can be undertaken when a member state experiences serious balance of payments difficulties, Articles 119 and 120 EC provide for the possibility to reintroduce 'quantitative protective measures' against third countries."

The document is is annexed to the Commission's 2003 EU Economic Review, released quietly last week. Some officials in Brussels, Berlin, and Paris believe the Bush administration is engaged in a "beggar-thy-neighbour" currency war.

Strong factions within the French and German governments want the European Central Bank to counter the "easy credit" policy of the US Federal Reserve with aggressive monetary expansion in Europe.

Faced with stubborn resistance from the anti-inflation hawks at the ECB, they are instead eyeing exchange rate policy as a means of imposing their will.

While capital controls are viewed as the "nuclear option" if all else fails, the collapsing dollar is rapidly bringing the issue to a head. A senior EU official told the Daily Telegraph that an exchange rate of 1.35 against the dollar is a likely trigger.

It is unclear where such a decision would leave Britain. While treaty law does not allow controls between EU states, any restrictions on dollar inflows into the euro-zone would create a legal nightmare and play havoc with the City of London.

Oliver Letwin, the shadow chancellor, said: "It is utterly risible for the EU to take a step back in time and pretend it can effectively control global capital markets."

The European Commission said there were no plans to impose exchange controls. "It's utter rubbish. The fact that we have carried out a study doesn't mean we are going to do it," said a spokesman.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/12/04/cneu04.xml&menuId=242&sSheet=/portal/2003/12/04/ixportal.html&secureRefresh=true&_requestid=68120

Posted 1:56 PM by Dil
December 01, 2003

The age of the dollar is ending in a sea of debt
William Rees-Mogg

I have sometimes written about international terrorism and sometimes about the world’s monetary system. I am sure that more people actually read what I write about terrorism. Yet the world monetary system is the more important subject of the two. The breakdown of monetary order would be a far greater threat to the wellbeing of readers of The Times.

These historic processes take decades to complete themselves. Nevertheless, the era of dollar hegemony, which started in 1945, seems now to be coming to an end, just as the era of the gold standard came to an end when Britain went off gold in 1961. The present danger is that the world’s central banks may lose control of the coming transition.
http://www.timesonline.co.uk/article/0,,482-914835,00.html

Posted 12:47 PM by Dil
On firmer ground without Stability

William Keegan
Sunday November 30, 2003
The Observer

Farewell Stability and Growth Pact! Welcome to the evolving Growth and Stability Pact.

The nomenclature of the pact has caused endless confusion since birth. When European finance ministers agreed in 1996 on the need for a fiscal framework to reinforce the powers of the future European Central Bank, they called it the Stability Pact. The words and 'and Growth' were added later, at the Amsterdam European Council of 1997 - the one at which Tony Blair rode a bicycle. They were added because the French were concerned to inject a 'political element' into the interpretation of the pact.

Never forget that one French motive for supporting creation of the Eurozone was the belief that they could thus dilute what they regarded as the baleful influence of the German Bundesbank on monetary policy - ie, interest-rate decisions - on Europe. The Bundesbank hit back by insisting, during the crucial negotiations over the Delors report of the late Eighties, that the new European Central Bank (at that stage it was even being talked about as the EuroFed) should be even more orthodox and counter-inflationary than the Bundesbank itself.

The French were therefore desperate - rightly - for something to suggest that the new arrangements would not be too 'monetarist'. After much huffing and puffing, the Stability Pact, agreed in Dublin in 1996, became the Stability and Growth Pact.

Pohl was strongly critical of the Stability and Growth Pact when addressing a seminar at the Financial Times not long ago. He had nothing to do with the pact (he had already retired) but the Bundesbank and the German finance ministry did. It is perhaps no wonder that Theo Waigel, the Finance Minister at the time, was almost apoplectic last week about its manifest demise, when Germany and France joined forces to defend their 'excessive' budget deficits and refused to pay the designated fines.

But as the Organisation for Economic Co-operation and Development calculates in the preliminary edition of its December economic outlook, the (cyclically adjusted) fiscal deficit of the Eurozone next year looks like being 1.5 per cent, compared with a forecast 6.5 per cent in Japan and 5.1 per cent in the US.

One of the mistakes made in devising the Stability Pact was for the drafters to insist on treating all 'regions' in the same way. This was a pre-Keynesian approach, as indeed was the failure to allow sufficient scope for the effects of the economic cycle, and for distinguishing between consumption and investment.

An article in the November issue of the Cambridge Journal of Economics by Ronald Schettkat ('Are institutional rigidities at the root of European unemployment?') throws a welcome bucket of cold water over the conventional wisdom.

The author notes that, by contrast with Germany's high unemployment levels, the Netherlands has achieved an unemployment rate of 3 per cent. He finds that, although 'A widely held view regards a distorted incentive structure in welfare states as the "root of the European unemployment problem" ... welfare state institutions in the Netherlands are more generous than German ones.' He finds the explanation in different approaches to macroeconomic policy.

In the US, macroeconomic policy has become wildly expansionary. In Europe the embarrassing collapse of the Stability Pact affords an opportunity for a sensible rethink of an inadvisably restrictive fiscal policy.
http://observer.guardian.co.uk/business/story/0,6903,1096117,00.html