Blame the Bundesbank

The euro remains strong against the dollar and yen, damaging smaller Eurozone economies. Here's why.

Why is the euro so strong when the euro area’s economy is barely out of recession?

The question puzzles experts and unnerves Europe’s political and business leaders. It should scare the U.S., too, because a return to recession for one of its biggest export markets would drag down the tentative recovery.

Hypocrisy is also contributing to fraying European solidarity. The Bundesbank tirelessly lectures countries such as Italy and Spain on how important it is that they get their costs down, so that they can become more globally competitive and start to grow again by boosting exports. At the same time, however, the German central bank is making that task even harder by enabling the euro’s rise. Whatever suffering the surging euro causes German manufacturers, it is small change compared to the damage inflicted on Europe’s poorer countries.121813_Krauss_PQ1

A new and more pragmatic approach is badly needed at the Bundesbank. Weidmann thinks too much in terms of rules and not enough in terms of whether the European ship can withstand their consequences. Yes, he has ultimately lost on the big monetary policy decisions, such as the November rate cut and last year’s introduction of the ECB’s Outright Monetary Transactions bond purchasing program. Yet his resistance is creating unnecessary costs and hardship for Europe.

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