The European Central Bank has decided to keep interest rates up and to threaten higher rates still. Meanwhile, the Fed is moving to recession fighting, with many expecting lower interest rates despite recent rhetoric. The dollar drifts lower, the Euro rises.
The higher Euro is making it very difficult for companies in many parts of the Eurozone to set competitive prices for their products in world markets. In the US there is an export surge underway, and European companies are coming to realise that the US is now a cheaper and better place for manufacturing than countries in Euroland.
Airbus is going to have to cut its European costs or put some if its manufacturing into lower cost places elsewhere. They should not expect immediate relief from the European Central Bank, and should remember that the stronger German currency needs higher interest rates than the weaker parts of the Eurozone.
European politicians like the French President are keen to take the Euro and European interest rate down, but many Europeans will want the counter inflation strategy to continue. Whilst Euroland battles over its future the US will enjoy being a magnet for investment and a stronger exporter. Airbus may whinge all it likes, but it needs to become more efficient.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
4 Comments
President Sarkozy has certainly expressed his concern that the Euro is overvalued to chancellor Merkel and there is great concern growing in Europe over the ever-widening disparity between the Euro and the Dollar. I am worried that the US is about to open the door to inflation while at the same time the European economies will stagnate. Both need to reverse economic policy but in a measured way. John, what do you consider to be the ideal rate of interest, say, 3 to 6% over inflation?
Reply: The real rate of interest needed will vary depending on the state of the cycle. If the economy is overheating and there is no spare capacity we would need a higher rate than if things are cooling and there is spare capacity. The long run rate will be around the rate of growth of productivity – which seems to have fallen from 2.5% to 2% under this government.I think we need to be in slowdown fighting mode now – inflation will subside next year.
Makes you wonder why the price of petrol is going up at the pumps (
I've just been on holiday to the USA – lovely – everything half price!
Meanwhile, I observe, everything possible is being done by this incompetent government to resuscitate inflation.
Well here comes the stress in the Eurozone. I always said that the real test for the EURO will come when Germany starts to recover.
By the Eurozone interest rate has been pretty neutral apart from the effect on Ireland has escaped notice on what a low interest rate has done to their economy and home ownership because it is one of those small side countries in Europe. Now those interest rates are starting to rise in Eurozone, watch the housing market in Ireland!