European financial and political leaders, alarmed at the rapid rise of the euro, have tried their best to jawbone it into submission. They've condemned the euro's 22% surge against the greenback in the last year as "brutal" and "not welcome" and "painful" and "not appropriate."
None of that has done much good. After a rhetorical blast from the European Central Bank, the euro did tumble from a high of $1.29 to $1.23 by Jan.16. But since then, it has been edging back. And, when Federal Reserve Chairman Alan Greenspan signaled on Jan. 28 that his ultra-easy monetary policy would eventually end, the euro took another dip. But currency experts still expect it to rise beyond $1.30. There's even talk of a $1.40 euro. Bernd Pischetsrieder, CEO of German carmaker Volkswagen, says that "the problems resulting from the strong euro top my agenda."
What to do? "The ECB's verbal intervention to date is simply not credible," says Umberto Alvisi, a currency economist at Credit Suisse First Boston. If the ECB is serious about stemming the euro's rise, he says, it will have to intervene by selling billions of euros and buying dollars. That's what the Japanese have done with the yen for the past 12 months.
TACTICS AND TIMING. But intervention in Europe is no easy matter. In Japan, all that was required was an informal agreement between the Prime Minister, the Finance Ministry, and the governor of the Bank of Japan. In the great, slow-moving Eurocracy, intervention would need the approval of a long chain of committees.
Here's how intervention, Europe-style, would proceed. The 1992 Maastricht Treaty that underpins the euro gives the European Central Bank day-to-day responsibility for controlling the flow of money. But it also allows the European Union's Economic & Financial Affairs Council, or Ecofin, made up of EU Finance Ministers, to set a "general orientation" for exchange-rate policy in exceptional circumstances. In practice, that means the Finance Ministers would make the decision to intervene in consultation with the ECB and the European Commission.
The trouble is, Europe's policymakers don't agree on what to do. Several powerful Finance Ministers, including Germany's Hans Eichel, would prefer that the ECB blunt the euro's rise by chopping interest rates, which, at 2%, are twice as high as the base rate set by the U.S. Federal Reserve. But ECB officials still take seriously their main mandate: to ensure price stability. They worry that an interest-rate cut would spur inflation at a time when euro-zone prices are already rising at a 2% annual clip -- the upper level that the ECB considers tolerable.
Other observers think the ECB will soon have to act. On Jan. 22, Jean-Philippe Cotis, chief economist of the Organization for Economic Cooperation & Development, warned that if the euro appreciates much further, the "ECB will have no choice but to intervene and cut rates."
But for intervention to work, it must be coordinated with the U.S. The Americans, without saying so, are content to let the dollar fall against the euro and are unlikely to have much patience for discussions of intervention when Group of Seven Finance Ministers and central bankers meet in Boca Raton, Fla., on Feb. 6-7. Even a coordinated intervention has its risks: Some senior officials at the ECB insist that as long as the U.S. runs up huge current account and budget deficits, no move by the central banks will have much impact. Don't intervene, and the euro rises to crushing levels. Intervene and risk humiliation. It's an impossible choice.
By David Fairlamb in Davos, Switzerland, and Stewart Fleming in Brussels