Strong Euro inflicts pain

The European Central Bank (ECB) will make itself unpopular with several leading European politicians on Wednesday December 6 by raising its benchmark interest rate to 3.50%. Their concern is the effect that a strong currency will have on exports, and thus the euro-area’s economic recovery. Movements against the dollar have certainly been dramatic.

Spanish and Belgian leaders have complained, but the French have been the most vociferous. Economic growth in France ground to a halt in the third quarter, and Prime Minister Dominique de Villepin has said the ECB should put its monetary tightening on hold to let the euro depreciate.

However, domestic politics have motivated such complaints more than concern over the robustness of a European economic recovery. While the ECB can be criticised for fighting a battle against inflation that it has already won, euro-worries are misdirected. A more serious problem is the euro-area’s over-reliance on exports as the main motor of growth. The solution is to re-balance growth towards domestic demand.

That requires reform, which in turn means strong leadership and considerable political will. Both are in short supply -- in France and elsewhere.