Waiting for Others to Act Will Only Make Europe Feel Queasy ; Europe Loses on Two Counts: Deteriorating Competitiveness and Falling Asset Values in Euro Terms

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BRUISED, BATTERED, but so far unbowed. Europe's economies may be under threat from the "brutal" volatility of exchange rates - European Central Bank president Jean-Claude Trichet's way of expressing concern about the euro's strength - but Europe's policy- makers have so far done very little to deal with the problem. Verbal expressions of discomfort, perhaps, but no real action. It's a bit like having a tummy upset - you know that, in the end, something unpleasant is likely to emerge out of one end or the other, but you lie in bed, hoping and praying that, this time, you will be spared that horrible dash to the toilet.

Yet, funnily enough, once you've made that dash, and emptied your stomach's contents, you often tend to feel a whole lot fitter. Far better, then, to act than to ignore your discomfort. For the time being, though, Europe's policy makers have chosen not to act. And this lack of action will only make the economic stomach cramps even worse.

The decision to do nothing has been rationalised through some rather peculiar "doublespeak". The editorial writers of the European Central Bank's monthly report argue that, yes, the euro's strength will have a negative impact on the eurozone economy but that the situation need not be a disaster. Indeed, the ECB argues that, with the rest of the world now recovering strongly, eurozone exports will flourish even with the rise in the euro. Specifically, the ECB says that "although recent exchange rate developments are likely to have some dampening effects on exports, export growth should continue to benefit from the dynamic expansion of the world economy."

I know what they're getting at. For most countries, the level of demand in other parts of the world is a much more important influence on export performance than are exchange rate movements. But there are two reasons why this doesn't quite let the ECB off the hook. First, the ECB has been highly critical of policies followed in other parts of the world. For example, it has strongly criticised the Americans for their pursuit of low interest rates and loose fiscal policy against a background of a large and rapidly widening current account deficit. If the ECB is right - that this US approach is unsustainable - it's a bit rich for the ECB to then claim that European exports will benefit from dynamism elsewhere. This looks suspiciously like a classic free-rider problem: do nothing yourself, and benefit from - possibly wrong - policies pursued in other parts of the world.

Second, the eurozone's growth record in 2003 was disappointing both compared with consensus expectations at the beginning of last year and with the results seen elsewhere, particularly those recorded in the US and in Asia. Why the disappointment? One factor that surely played a role was exchange rate movements. The euro was far stronger than expected through the course of 2003, basically implying that the US and Asia benefited from a sustained improvement in competitiveness against Germany, France and the other members of Europe's single currency. In other words, it's slightly odd to argue that Europe will be absolutely fine because of the strong expansion taking place elsewhere when, in truth, that strong expansion has come at Europe's expense.

If anything, from Europe's point of view, this story is likely to get worse. The US may be growing strongly, but there's very little in the way of jobs growth. …