Recent exchange rate moves "are a reason for concern" and the euro is reaching a level that is no longer in line with economic fundamentals, European Commissioner for Economic and Monetary Affairs Joaquin Almunia said Saturday. According to the prepared text of a statement to be delivered to the International Monetary and Financial Committee in Washington, Almunia also stressed that there is a risk of exchange rate overshooting given increased volatility on markets. "Exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. Recent exchange rate moves are an issue of concern. The increased volatility in foreign exchange markets, which has accompanied the financial turmoil, points to the risk of exchange rate overshooting," Almunia said according to the prepared text. "The euro's real effective exchange rate is approaching a level where it would clearly no longer be in line with economic fundamentals. Euro-area authorities have noted with great attention that the U.S. authorities have reaffirmed that a strong dollar is in the interest of the U.S. economy. "In order to contribute more strongly to the rebalancing of global current account imbalances, the currencies of the countries with the largest current account surpluses should appreciate more substantially in effective terms," he said in the prepared text. The euro-zone's single currency has risen sharply against the dollar in recent months, up about 17% against the U.S. dollar over the past year, fueling concern that it would hurt exports in the 15 countries that use the euro. Almunia's comments come after the Group of Seven leading industrial nations Friday warned that since its last meeting, "there have been at times sharp fluctuations in major currencies." The G7 in its communique said that "we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate." In his statement Saturday, Almunia also said that the economic uncertainty has increased "and the real economies of advanced countries are more affected by the financial turmoil." He also said that the risk "has increased" for the U.S. to fall into a recession. "Real (gross domestic product) growth in the euro area is also slowing down, although less rapidly than in the U.S.," Almunia said. Still he said, despite the expected slowdown, "the (European Union) economy is in a relatively favorable position to absorb the effects of the financial turmoil, having strong fundamentals and no significant macroeconomic imbalances," Almunia said. As a result, there is "no need for policy activism in the E.U., where the more appropriate approach is to maintain a firm commitment to stability-oriented monetary and fiscal policies and growth-enhancing structural reforms." Looking at pressure on prices, Almunia also said that "inflation has been an increasing worldwide concern because of soaring commodity and food prices. Policymakers are thus confronted with numerous challenges and will need all their acumen to restore confidence and to limit the fallout to the real economy." Commenting on the surge in foreign reserves in some countries, which often finance deep-pocketed sovereign wealth funds such as those in China, the Middle East and Russia, Almunia acknowledged the beneficial contribution of SWFs to E.U. economies and said such funds "are very welcome in Europe." However, he called on these funds to provide more transparency, governance and accountability. "The E.U. is of the opinion that a global multilateral approach is to be preferred to unilateral ones," Almunia said. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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