Former European Central Bank president Jean-Claude Trichet said policies targeted at weakening a country’s exchange rate can trigger competitive devaluations without having any benefit.
“We know that these kind of policies are not positive for all participants,” Trichet said in an interview in Tokyo today. “If all currencies are going down it doesn’t change anything.”
The yen has declined about 8 percent against the dollar this year after a change of government prompted the central bank to raise its inflation target with the aim of stopping prices from falling. Leaders of the Group of 20 industrialized nations agreed last month that countries wouldn’t target their exchange rates for competitive purposes. The Group of Seven also issued a statement calling for market-based exchange rates.
“It’s been reaffirmed by the G-7 that the fundamentals and the market had to determine the value of the various currencies,” Trichet said. “It was an appropriate reminder.”
Trichet, who was president of the Frankfurt-based ECB from 2003 until 2011, said he believes Italy will continue with economic reforms even after an election last week handed a quarter of the vote to an anti-austerity party led by former comedian Beppe Grillo.
Lack of Confidence
“I cannot help thinking that they will find out a way to continue to proceed in a direction, which is adjustment, structural reforms, and improving the growth potential of the country,” he said.
The main problem the euro area currently has is a lack of confidence in national and European institutions, Trichet said.
“In a number of countries and economies you still have an absence of confidence because the adjustment process has not yet finished,” Trichet said, adding that he doesn’t see a risk of deflation in the single currency area.
“The countries that were highly imbalanced are undoubtedly, progressively, but very effectively, correcting these imbalances,” he said. “We are in a situation that calls for no complacency.”
Trichet is currently the chairman of the Group of Thirty and a board member of European Aeronautic, Defence & Space Co.