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Weidmann Warns Governments Against Trying to Weaken Euro

European Central Bank council member Jens Weidmann
European Central Bank council member Jens Weidmann said if more and more countries try to depress their currency, it will end in a depreciation competition, which will only produce losers. Photographer: Peter Foley/Bloomberg

European Central Bank council member Jens Weidmann said the euro isn’t seriously overvalued and warned governments against trying to weaken the currency.

“Latest indicators don’t signal a serious overvaluation of the euro despite its recent appreciation” and “politicians should hold on to the established division of labor,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Freiburg today. “An exchange-rate policy to specifically weaken the euro would lead to higher inflation in the end.”

French President Francois Hollande last week urged government leaders to steer the value of the euro lower to boost growth, a proposal rejected by German Chancellor Angela Merkel. The Group of Seven nations are considering issuing a statement saying they won’t target exchange rates when setting policy as they try to calm concern the world is on the brink of a currency war, two officials from G-7 countries said earlier today.

“Experience from previous, politically induced depreciations show that they don’t normally lead to a sustained increase in competitiveness,” Weidmann said. “Often, more and more depreciations are necessary. If more and more countries try to depress their currency, it will end in a depreciation competition, which will only produce losers.”

Euro Jumps

The euro jumped half a cent to $1.3428 on Weidmann’s comments. It has appreciated 11 percent on a trade-weighted basis since late July. The currency’s gains are threatening to hurt euro-area exports and stymie the 17-nation bloc’s recovery from recession as the sovereign debt crisis shows signs of abating.

Japanese Prime Minister Shinzo Abe’s push for more aggressive monetary policy has raised concern abroad that his government is directly seeking to weaken the yen, something it denies.

ECB President Mario Draghi last week precipitated the euro’s biggest drop in seven months when he suggested the ECB could lower interest rates if the stronger euro were to damp inflation too much.

Weidmann said exchange-rate developments “certainly are taken into account in monetary-policy decisions, given that they influence price developments.”

However, he said the ECB has already done enough to fight the debt crisis and it’s up to lawmakers to implement structural reforms at the national and European level.

“The problems can only be solved by politics, central banks can’t do it,” he said. “Therefore, the discussion about an allegedly overvalued euro is only diverting attention from the actual challenges.”

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