France Asks for More ECB Action to Weaken Overvalued Euro

French Prime Minister Manuel Valls called for more action from the European Central Bank to lower the value of the euro, amid concerns the 18-nation region might be headed toward deflation.

“The monetary policy has started to change,” Valls said yesterday in a speech at the Socialist Party’s summer school in La Rochelle, France. While he called the ECB’s package of measures taken in June a “strong signal,” he said that “one will have to go even further.”

Valls’s comments come after ECB President Mario Draghi, who’ll meet French President Francois Hollande today in Paris, signaled last month that declining inflation expectations are pushing the central bank toward introducing quantitative easing. Policy makers will gather in Frankfurt on Sept. 4 for their monetary-policy meeting.

Draghi also suggested it would be “helpful” if EU governments with room to ease fiscal policy did so, prompting German leaders to sharpen their tone. Governments in France and Italy, the second and third-biggest euro-area economies, chafe at German Chancellor Angela Merkel’s insistence on debt reduction even as Europe’s debt crisis wanes.

Jackson Hole

Inflation in the currency bloc slowed to 0.3 percent in August from a year earlier, the lowest since 2009, compared with an ECB target for price growth of just under 2 percent. Draghi has said that the ECB stands ready to embark on unconventional measures such as broad-based asset purchases to avoid a deflationary spiral of falling prices and households postponing their spending plans.

Speaking on Aug. 22 at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming, Draghi said he’ll use “all the available instruments needed to ensure price stability” and ECB officials are “ready to adjust the policy stance further.”

In that speech, Draghi also called for complementary action on a European level and “a large public investment program.” German Finance Minister Wolfgang Schaeuble said in Berlin yesterday that deficit-fueled growth leads to economic decline over time, signaling discord with Italy and France as euro-area seeks to spur growth.

Merkel Call

The countries in the region that pursued austerity policies in return for sovereign bailouts are “doing much better than all the others in Europe,” Schaeuble said. “That’s how it is with medicine: sometimes it tastes bitter for a while. But if it helps, that’s good.”

Merkel called Draghi to ask if the ECB had changed course on austerity, Der Spiegel reported, without saying where it got the information.

The magazine’s assertion that Merkel “demanded answers” from Draghi “in no way corresponds to the facts,” Merkel spokesman Steffen Seibert said in a text message.

“We do not provide commentary on confidential conversations, but the statement made is inaccurate,” an ECB spokeswoman said by e-mail. She declined to comment on Valls’ call for more ECB action.

The debate about further ECB stimulus to spur the euro-area economy has gathered momentum three months after Draghi introduced a range of measures including a negative deposit rate and targeted long-term loans for banks.

The euro has weakened by almost 4 percent against the dollar since June 5, when the ECB cut all its main interest rates. It traded at $1.3135 at 10:28 a.m. in Frankfurt today.

The ECB “is ready to offer additional liquidity to the banks, on condition that the banks increase their credit to the real economy,” ECB Executive Board member Benoit Coeure wrote in an essay in Greek newspaper Ta Nea on Aug. 30.

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