Mundell Says ECB Tolerating Euro Gains Worsened Debt Crisis

The European Central Bank worsened the crisis in the region’s most indebted nations by tolerating the euro’s appreciation against the dollar, according to Nobel-prize winning economist Robert Mundell.

Europe’s policy makers “missed a big opportunity” to do a deal with the Federal Reserve that would have enabled them to stop the currency from strengthening as the U.S. central bank bought debt to boost the economy, Mundell said in a Bloomberg Television interview with Sara Eisen. The euro’s advance was a “devastating thing to happen” for the region’s weaker economies and Europe should consider its own form of asset purchases, which tend to weaken the exchange rate, he said.

“When the dollar was already high and the euro was low, at $1.20, it was a good time to step in,” Mundell said. The “next time it happens, that the euro gets down low, they should keep it there and not let it get above that. That’ll do wonders to help revive the European economies.”

Europe’s common currency has climbed 9.5 percent since slipping to $1.1877 in June 2010, the weakest level since March 2006. It fell to as low as $1.2043 last year, before surging as high as $1.3711 in February. The currency was at $1.2928 at 10:10 a.m. New York time, compared with its lifetime average of $1.2128.

Cyprus Agreement

“It’s just mind-boggling” they could allow the exchange rate to appreciate, said Mundell, who is professor of economics at Columbia University in New York.

Mundell, credited as the intellectual “father” of the euro, has historically called for a weaker shared currency. He called for the euro to “go back down substantially” after completing its biggest three-month rally in seven years in June 2009. The shared currency continued to climb, rising another 5.2 percent over the following six months.

He also called in 2009 for the euro to be fixed against the dollar, a measure which was never enacted.

The 17-nation currency extended losses as Nicholas Papadopoulos, Cypriot lawmaker and chairman of the parliamentary finance committee, said leaving the euro must be “explored.” Cyprus avoided default and an unprecedented exit from the euro by bowing to demands from creditors yesterday to shrink its banking system in exchange for 10 billion euros ($12.9 billion) of aid from the European Union, European Central Bank and the International Monetary Fund.

The bailout accord will see Cyprus Popular Bank Pcl wound down, wiping out bondholders, and will impose losses on some depositors at Bank of Cyprus Plc.

-- Editors: Paul Dobson, Dave Liedtka

Before it's here, it's on the Bloomberg Terminal.