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June 02, 2005

The Europeans Figure Out How to Stop the Appreciation of the Euro

Edward Hugh refers us to:

Bloomberg.com: Germany: The German Finance Ministry declined to comment on a magazine report that discussions took place last week between Finance Minister Hans Eichel, Bundesbank President Axel Weber and economists on a possible failure of European Monetary Union.

Stern magazine said in a pre-released article today that the group discussed a scenario for the single currency's collapse as differences in inflation and growth rates within the union grow. An internal ministry document formed the basis of discussions, Stern said.

The Finance Ministry ``doesn't comment on internal papers or meetings,'' said spokeswoman Sandra Hildebrandt in a telephone interview today. ``The euro is a success story.''

Inflation and growth differentials ``can lead to a meltdown in a couple of years, the collapse of the euro,'' the German magazine quoted Joachim Fels, chief fixed-income economist at Morgan Stanley, who took part in the meeting, as saying.

"The gap risks widening, so that the danger of an adjustment crisis is growing bigger,'' Stern quoted the Finance Ministry document as saying. Germany's lower house of parliament has commissioned a legal opinion on a possible reversal of EMU and the right of one of its members to leave the currency, Stern said.

The introduction of the euro has cost Germany its former advantage of lower financing costs, which partially explains why it's lagging behind the other euro members, the ministry said in the report, according to Stern.

Posted by DeLong at June 2, 2005 11:33 AM