European central bank governor Wim Duisenberg yesterday sought to reassure worried savers and consumers that the tumbling euro would not ravage their nest eggs or stoke up the cost of living.
His unusual verbal intervention, combined with rumours that European central banks might be prepared to back it by buying euros on foreign exchanges, helped the shell-shocked currency stage a modest rally from Thursday's record lows, though it was unable to hold its best levels.
In what was described as an unprecedented statement Mr Duisenberg acknowledged that the fall in the euro, which has lost a quarter of its value against the dollar since its launch in January last year, was causing concern to citizens in the 11-nation euro-zone. "I understand their concerns since a persistently lower exchange rate might ultimately lead to higher prices in the shops," he said.
But he said the region was enjoying one of its longest periods of price stability for decades and, in a passage reminiscent of British prime minister Harold Wilson's "pound in your pocket" argument in 1967, he said: "This internal stability of the euro means people can be confident that their savings and pensions will keep their value over time."
He said the ECB was watching the exchange rate closely and -pointing to four interest rate rises since November - said it would do all it could to maintain price stability.
The euro has fallen from a launch value of $1.17 to as low of 88.40 cents against the dollar this week. Though it managed a modest initial rally to 90c, it then fell back later in the day to just over 89c.
Analysts were divided about the wisdom of Mr Duisenberg's speech. Eckhard Schulte at the Industrial Bank of Japan in Frankfurt criticised Mr Duisenberg's initiative. "It isn't sensible to heat up or dramatise the current atmosphere around the euro by making such a statement. The popular debate on the euro has been emotional and irrational and this statement is exactly what we do not need."
But Uwe Angenendt, chief economist at the BHF bank welcomed the ECB president's move. "Putting out a statement is certainly an unusual means of getting the point across but ECB policy is on the right path. Growth and inflation data in the coming months will improve so much that the euro has probably found its low."
Rumours that the ECB is preparing to mobilise its huge reserves in defence of the euro were rife in the foreign exchange market yesterday though there was no official comment.
"I have the feeling the ECB really is thinking about intervention, to give the market a strong hint that it won't accept a further depreciation of the euro," said HSBC Trinkhaus economist Frank Schröder. But he warned the tactic could backfire if the markets subsequently decided to test the ECB's determination.
The single currency's plight will be on the agenda at Monday's meeting of eurozone finance ministers, though German chancellor Helmut Schröder had affected unconcern. "I think it is appropriate to be relaxed. I am quite certain the euro is a strong currency," he said.
But Italian prime minister Giuliano Amato said there was a need for greater economic policy coordination and blamed international trade imbalances for the weakness of the single currency.
European Central Bank president Wim Duisenberg yesterday:
The current development of the euro's exchange rate has given rise to questions from European citizens who are concerned about the value of their currency.
To them, I would like to say the following: I understand their concerns, since a persistently lower euro exchange rate might ultimately lead to higher prices in the shops. It may also undermine the perception of the euro as a stable currency. Therefore, we at the ECB monitor the euro exchange rate very closely.
Citizens should feel reassured by the fact that prices are currently stable in the euro area. Indeed, over the last decades there have been few periods in which prices have been stable for so long. This internal stability of the euro means that people can be confident that their savings and pensions will keep their value over time.
The ECB has, over the past six months, taken measures and increased interest rates four times. European citizens can be assured that the future of the euro is that of a strong currency, based on price stability and the strength of the European economy.
Prime minister Harold Wilson in November 1967 explaining the Labour government's decision to devalue the pound:
It would have been possible to ride out this present tide of foreign speculation against the pound by borrowing from central banks and governments ... In our view it would have been irresponsible to go on dealing with these successive waves of speculation by borrowing ... without tackling the root cause of the speculation.
From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank has been devalued.
I have said that imports will cost more and this means higher prices over a period for some of our imports, including some of our basic foods.
It is vital that price rises are limited to those where increased import costs make this unavoidable. Our people will not tolerate traders who are not affected by import costs trying to cash in by unjustifiable price increases ...
It is just as vital that any prices that do go up are not used as an excuse for excessive wage demands.
