The French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, pledged to breathe new life into their traditional special relationship, says Paul Betts in the FT. But that relationship now seems to be threatened by their dispute over independence of the European Central Bank (ECB) and exchange-rate management. Sarkozy argues that the strong euro (it hit a record high against the dollar this week) undermines growth and hurts exporters. Germany disagrees, arguing that a strong currency benefits the economy by making energy (priced in dollars) cheaper, and by forcing exporters to focus on cutting costs and improving efficiency. It also gives Europe a chance to make acquisitions in dollar-based economies. Merkel also insists that ECB independence is essential in fighting inflation.
Sarkozy is right to say that ultimate power over the euro’s exchange rate rests with politicians, said Ambrose Evans-Pritchard in The Daily Telegraph. The ECB’s claim to sole authority is a breach of the Nice Treaty. Article 111 states that politicians may compel the ECB to change course on interest rates; this question is no longer academic, now that euro strength threatens to suffocate France, Spain, Italy, Portugal and Greece. A strong euro could also harm Germany, says Wolfgang Munchau in the FT. The German finance minister mischievously said that he loves a strong euro, but if it continues to rise, as is likely, Germany will suffer; its economy remains heavily dependent on exports. “My hunch is that the German government will find it difficult to stick to its current position and that Mr Sarkozy will win this argument. It would be much better if the eurozone adopted a more structured process to deal with exchange-rate overshoots. But in the absence of such a strategy, what we are most likely to get is confusion followed by panic.”