‘Euro Overvalued’

The euro is apparently overvalued. Actually I happen to agree, but today this opion comes to us from a most surprising person: Luxembourg Prime Minister Jean-Claude Juncker, at this point in time President of the European Union. Now I am surprised by this, since he is neither Economics commisioner, nor spokesperson for the ECB, so I am not clear why it is he feels himself compelled to express an opinion.

Really this just highlights the fact that the institutional labyrinth we have created is such that not even those who administer it have sufficient clarity about who is responsible for what. In theory his press conference was about the forthcoming budget negotiations, but judging by what he said, I’m not clear he got round to reading that memo from Barroso about maintaining a sense of calm.

Luxembourg Prime Minister Jean-Claude Juncker, who holds the European Union presidency, warned on Friday that failure to agree on a new long-term EU budget this month would turn a political problem into a full-blown crisis.

Juncker, who also chairs euro zone finance ministers, said the single currency shared by 12 EU countries had been weakened by the “No” votes to the European constitution in France and the Netherlands but was still overvalued compared to the dollar.

“A failure on the financial perspective (budget) would turn the big European difficulties (after the referendums) into a big European crisis,” he told a news conference.

“As a result of the referendums, the euro is weakened. What helps the economy for the moment could in the long term become a burden,” he said, adding: “I think the euro is overvalued in relation to the dollar.”

He also informed the press that he would resign as PM if, as expected, the Luxembourg referendum voted ‘no’ on July 10. Anybody seen an actual Luxembourg poll recently?

This entry was posted in A Fistful Of Euros, The European Union and tagged , , , , , , , , by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

19 thoughts on “‘Euro Overvalued’

  1. “Now I am surprised by this, since he is neither Economics commisioner, nor spokesperson for the ECB, so I am not clear why it is he feels himself compelled to express an opinion”
    He’s a head of government of an EU member state. He can say what he likes on ANY matter of public policy. You seem to have internalised the norm that the existence of “independent” institutions like central banks or constitutional courts means that everyone else needs to shut up. Try saying that to a US Senator.

    You have a deeply disturbing view of politics in a democratic country.

  2. Look Otto, I don’t know if my view is disturbing or not, but currency policy is a sensitive issue. The euro is under attack. Lets be absolutely plain: Junkers job is to keep his mouth shut, in the same way that the referee in a France, Germany football match shouldn’t be speculating during the match on which is his favourite team.

    I was going to make the comparison, but thought it unnecessary, about the time George Bush voiced the view that US stocks were a good buy. You just don’t do this kind of thing. They are the rules of the game. Power *and* responsibility etc.

    My impression, and it is only an impression, is that since Wednesday night, when the Geramany goes back to the Deutschmark scare began, the trans-Atlantic telephone lines went into action. Suddenly the euro firmed up, and stayed at around $1.2280. Remarkably stable when you think of everything which is going on.

    I think no-one, but no-one wants this to turn into a euro rout.

    Anyway be that as it may, since his statement we are on our way down again: $1.2214 at the time of writing. All that hard work thrown away, by one or two ill chosen words. This is my beef.

    In another moment, he can say what he likes, within reason, but not now, and not while he is President.

    And I repeat, I agree, the euro is overvalued, but then I’m not President, and I wouldn’t like to see it come down with a crash either.

  3. Thanks for all of your links and comments about the value of the Euro. I like this blog very much. I import merchandise from Italy so I would LOVE to see the Euro come down in value. Also people in Europe who depend on tourists in their countries for the summer would like a devalued Euro also. I know it depends on where you are on the globe what your views may be about the Euro’s value. My Greek husband says that Europe doesn’t need (in the case of Turkey) a muslim country in the EU. Cheap labor and people immigrating from everywhere making a mess of everything. (His view)

    Cynthia in Florida

  4. Cheap labour and immigration making a mess of everything.

    Queer thing for an emmigre to the United States to say, no? Queer and hypocritical I may add.

    Let’s say the Greeks have complexes to unlearn in regards to the Turks, the way the French and the British have mutual complexes to unlearn.

    Allowing cheap(and archaic)prejudices to rule one’s thinking on such issues does one no credit.

    Regarding the Euro, however, very much agree with Edward. But our man in Luxembourg seems to have made a specialty in the last weeks of saying things when it would have been better (for his point of view) to have kept his mouth shut.

    The international currency markets are not in a particularly stable state at present, even by currency market standards, and wise official on currency issues becomes delphic during instability.

  5. I’m going to go out on a limb and assert that all things being equal, 1 Euro is essentially worth 1USD.

    Which sounds like I agree that I agree with Edward about the Euro being overvalued, except that I don’t. Because things aren’t equal.

    Does this No-vote by France and the Netherlands meaningfully change the fundamentals of the Euro ? I’m not convinced that it does as I don’t see how Yes-votes would have magicked away the existing problems.

    Either way, the constitution referendums do not change the economic fundamentals behind the US Dollar’s deterioration versus many of its trading partners.

    The shock of the No-votes temporarily turns the clock back to the currency rates of about a year ago, which makes it an opportunity Euro at a significant discount than they would otherwise be available.

    If People feel safer buying paper backed by the good faith and credit of George Bush’s government,
    I’d like to point out that our Treasury department has many of its top posts vacant, that our Budget and Trade deficits are at record highs, our GDP artificially goosed up by (1) war-spending, a war which we aren’t winning and (2) a loose-credit-driven housing bubble. And our job-creation statistics so anemic it’s hard to tell if we’re still suffering the effect of the 2000 recession, well into the weakest recovery on record, or about to slide into our next recession. Have I mentioned that GM’s bonds, by itself something like 16% of our national bond market, are deteriorating to junk-status ? Or the continuing deterioration of our public health system, and the corrosive effect it is having on our state governments’ budgets ?

    Pick your druthers, but be forewarned that the value of the U.S. dollar is not what it once was, not so very long ago.

  6. Collounsbury,

    I agree with you about the Greek complex thing. They all have it. About cheap labor…..here in Florida if cheap immigrant fruit picking labor was done away with prices would go too high for American’s. If WalMart and other large companys would stop selling cheap products made in countries where cheap labor is available….everyone would freak out. Old argument. Back to Greek political opinion…..Europeans are not as used to recent economic immigration as those in the USA. They’ll have to catch up and learn to live with it…
    Cynthia in Florida

  7. Cynthia,
    .Europeans are not as used to recent economic immigration as those in the USA.

    That’s not exactly true, they’re just (marginally) less at peace with it than Americans are.

  8. ” Earlier this week Juncker said he was ‘worried’ after a poll showed that the ‘no’ camp in Luxembourg had surged to 41 pct by last month, from 24 pct in October.”
    Source: forbes.com
    Compare this with the amazing figures on French developments a few posts ago and we might have a second casualty.

  9. @Patrick “Does this No-vote by France and the Netherlands meaningfully change the fundamentals of the Euro ? I’m not convinced that it does as I don’t see how Yes-votes would have magicked away the existing problems.”
    These are two different issues I think.
    The first one about the fundamentals is challenging.
    Since I started to use surfing/blogging as a way to learn more about politics and economy I try to get hold of what precisely those *fundamentals* are. Some of them are clear but not all.
    I was really amazed to find out that quite a number of *economical* indexes on consumer and corporation-confidence are actually based on straight forward questions on peoples views. At the same time these are accepted as strong idications of the nearby developments in the economy.
    Can points of view be fundamentals?
    Completely unlike how things function in a referendum, where every vote has the same weight, when it comes to confidence points of view of people have a very different weight depending on power and wealth.
    If the very wealthy decide that the NON and NEE should be seen as the start of European disintegratian and should they act accordingly when it comes to buying and selling (of currencies, stocks, bonds) and investing are we talking about fundamentals then?

    I do agree with you that Yes-votes would not have magicked away the existing problems but political stability is *fundamental* for healthy economical developments.

  10. Can points of view be fundamentals?

    Twenty years ago thousands of nuclear war heads were held ready to be launched at short notice partially based on a difference in point of view on how to organise society, country and economy.

  11. @Oliver. Of course points of view can have a huge effect on international relationships and so of course on the economy too. But I thought *fundamentals* should be all kind of parameters except for the points of view. Points of view can be wrong and information could have a corrective effect. If you talk about the effect of demographic developments (for example) on semi-long-term developments that is something really different. Or the shortage of oil etc.

  12. Hi Edward

    Great to see you back online :).

    And on form as usual. I’m in Cerdanyonla at a software company these days. Let’s meet up for a drink sometime.

  13. Hello Michael, I spend some years living in Cerdanyola while a student at the UAB. I suppose you work in the “Parc Tecnol?gic”, isn’t it?

    Well to go more on topic, I remember seeing a chart of ECU values in Dollars since its definition, and the starting point suggested to me that it was defined as a currency basket that was worth 1 $ per ECU. However during most of the time the notional value of an ECU was consistently greater. IIRC when the Euro was instaured, exchange rate was 1.16 $ per ?.


  14. But I thought *fundamentals* should be all kind of parameters except for the points of view.

    As the basic act of accepting a currency as a means of payment is an action of human choice, it seems to me that you cannot expect currency to be not fundamentally dependending on oppinion.

    Yet, there are more or less tangible fundamentals. If production falters and the money supply stays constant, there’ll be inflation.

  15. “So perhaps Juncker is trying to talk it down.”

    Possibly both these things are true Phil, but the point is this isn’t his job, he should leave that to the ECB under our system, this was for Trichet last Thursday – in the US it is the US Treasury and John Snow who has this role – and secondly, we are in the midst of an institutional crisis, which has contaminated itself into an identity crisis for the currency itself, and so this is not the moment for a ‘cool and calm discussion’.

    Obviously this is a topic they could talk about when they meet for the summit.

    “notional value of an ECU”

    Obviously the values between the two currencies will fluctuate, so there is no ‘true worth’, but if one economy is growing at 3.5% and the other one at 1.5%, then the former currency should tend to appreciate against the latter.

  16. Well — Juncker is not only Luxembourg Prime Minister, but also the finance minister, and during the Dutch EU presidency last year the euro zone finance ministers decided that Juncker would be their chairman for 2-1/2 years — ‘Mr Euro’ the press called it. In a way, he’s the representative of the euro zone.

  17. “In a way, he’s the representative of the euro zone”.

    This is a detail I actually had missed Nick, but then this is an illustration not only of lacunae in my knowledge, but also, and more importantly, of the complex and tangled mess which is our institutional structure. Given the delicate nature of currency markets, you need one institution, and one only, for handling day to day policy. I would stick with the ECB for this, and let national politicians, on behalf of their national governments voice opinions and lobby.

    Institutionally it is really messy, having one and the same person holding the presidents chair and shouting out opinions about currency.

    At the same time, the way he did it, in the middle of the biggest euro crisis since the currency came into exitence is inexcuseable from my point of view, doubly so if he could be thought to be speaking with some authority on euro matters.

  18. Juncker is well known for having a big mouth. It’s true to form. He sometimes goes out of his way to provoke it seems.

    On the polls – last I saw the yes camp was mid 40s and the no camp low 30s – a large yes majority – but nothing like as big as 6 months ago.

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