The Difficulties facing the EuroZone

Eurozone Finance Ministers & IMF claim the Euro is Overvalued

Eurozone finance ministers and the International Monetary Fund see the euro currency as too highly priced, Eurogroup chief Jean-Claude Juncker said Tuesday.

Speaking after a meeting of the 16 countries that use the single currency, also attended by the IMF's Europe director Marek Belka, Juncker said they were all agreed that the "euro is overvalued."

"We are in agreement with him when he says that the euro is overvalued and that a certain number of adjustments are desirable," he said, underlining that the unnatural strength of the euro was particularly the case when compared to China's yuan.

"We see it as abnormal that a fast-growing economy (China) devalues its currency in relation to a currency zone where growth performance is far less positive," he said, citing forecasts for eight percent annual growth in Chinese gross domestic product.

The European Commission is forecasting eurozone growth of 0.7 percent in 2010 and 1.5 percent in 2011.

On Tuesday, the euro moved higher against the dollar -- to which the yuan maintains a de facto peg -- as investor appetite for risk returned on the back of positive data from China, the United States and Europe and as fears eased of a Dubai default.

The single European currency in late-day trade was at 1.5094 dollars after 1.5005 dollars late Monday in New York.

According to French President Nicolas Sarkozy, at that level, "how do you expect us to sell planes to the United States?"

Speaking earlier in the day, Sarkozy said today's "multipolar world" should have a "multipolar monetary system."

Juncker met with Chinese premier Wen Jiabao on Sunday, along with European Central Bank chief Jean-Claude Trichet and outgoing European Union economic and monetary affairs commissioner Joaquin Almunia.

Luxembourg premier Juncker, set to be voted in for a new two-and-a-half mandate as eurogroup leader in January, said they were "not looking for an abrupt change in Chinese monetary policy."

Rather, he said, they explained to Jiabao, joined by the Chinese central bank chief and his finance minister, that Europe wanted to see a "gradual" realignment.

"We were of the opinion that an appreciation of the yuan compared to the euro was desirable to reduce the global disequilibrium we observe," Juncker added.

He said Chinese citizens would enjoy greater purchasing power if Beijing took back "control over its monetary policy."

He added: "Our Chinese friends don't see it the same way, that's hardly a surprise but we were determined to articulate our point of view to them."

Wen Jiabao on Monday said international pressure over China's currency policy was "unfair" after Trichet told reporters that the Europeans encouraged Beijing to take "a more flexible policy."

The yuan's exchange rate is one of the thorniest trade issues between China and the European Union.

When Beijing officials talk about keeping the yuan "stable," it typically refers to maintaining its current value.

The Chinese currency has been effectively pegged to the US dollar since mid-2008, and Europe fears the euro's resultant rise against the yuan will hurt EU exports to China and slow the continent's economic recovery.

Eurozone Says No to Fresh Stimulus

European Ministers reject U.S. calls for budget injection as "not to our liking."

Eurozone finance ministers yesterday rejected calls for increased economic stimulus measures, despite a worsening outlook for the EU economy. They also rejected any easing of the requirements for joining the Eurozone.

Speaking after a meeting of the Eurogroup, which brings together the finance ministers of the 16 Eurozone countries, Jean-Claude Juncker, the prime minister and finance minister of Luxembourg, said: "We don't feel we need to pile deficit on top of deficit and add further to our debt."

Juncker, who chairs the Eurogroup meetings, added: "We would not want to give the impression we are considering putting together other recovery packages."

His remarks followed comments from Larry Summers, director of the U.S. National Economic Council, in an interview with the Financial Times, that governments should pump more public money into their economies to fight the recession. "Recent American appeals" for a European budgetary effort are "not to our liking," Juncker said.

Juncker said ministers had rejected any relaxation of the criteria for joining the euro, including the length of time that countries have to spend in the European Exchange Rate Mechanism II. "There is no question of changing the criteria," Juncker said. "The credibility of monetary union is at stake," he added.

Both Juncker and Joaquín Almunia, the European commissioner for economic and monetary affairs, said that assessments of Europe's economic outlook are now worse than they were earlier this year. Juncker said that the recession is "certainly deeper than what we saw at the beginning of the 1990s." Almunia said that "the recovery will take longer than we were expecting a few months ago," and that he now expects a "gradual recovery" to start in 2010.