As the euro fell close to new lifetime lows, European Central Bank executive member Ms Sirkka Hamalainen hinted in Dublin last night that markets should be aware of possible intervention.
Speaking at the Institute of European Affairs, Ms Hamalainen said the concerted measures undertaken by the ECB jointly with other major central banks in the foreign exchange market a few weeks ago have "made it clear to market participants - and to the public at large - that all the policy-makers involved are concerned about the potential implications of a misalignment of the euro for the world economy".
However, the markets are unlikely to pay much attention, as the comments follow remarks from ECB president Mr Wim Duisenberg in a London newspaper that the ECB "would probably" not intervene when the fall in the currency was due to war in the Middle East or a sharp rise in the price of oil. Many traders said this was the main reason for the euro's fall to $0.8660 yesterday, just above lifetime lows of $0.8437.
Ms Hamalainen, the former Finnish central bank governor, also insisted that focusing so much on the current euro exchange was a "very short-sighted and even narrow-minded" way of assessing the performance of a project that has far-reaching structural implications for euro zone economies.
However, she repeated the ECB mantra: "This does not imply that we are content with the development of the euro exchange rate. We firmly believe that the current exchange rate does not properly reflect the fundamental strengths of the euro area economy."
But she also hit out at critics who say the weakness of the euro is a fault of monetary union. It was "illogical" to attribute the weakening of the exchange rate to the introduction of the euro itself. "The explanation most commonly given by observers is that the weakness of the euro is a reflection of the less favourable development of growth and productivity in the euro area relative to the United States. This, in turn, is blamed on structural rigidities in the euro area economy. We can only speculate on what kind of currency developments these factors would have triggered among the national currencies, had monetary union not taken place. The euro itself has only contributed positively to the necessary structural development process in the countries of the euro area."
Replying to criticism that the ECB is overly concerned about inflation, which is due to factors such as the weak euro and high oil prices, she insisted European interest rates remained low by historical and international standards. "Against this background, I find any accusation that the governing council consists of "a bunch of inflation nutters" - as I have recently read in some Anglo-Saxon newspapers - completely beside the point."
She also pointed out there were other benefits of euro membership for smaller countries which have generally strengthened their influence in the euro zone. "Before the start of monetary union, the central bank governors of the smaller countries, although responsible for their national monetary policies, were de facto largely dependent on the policy decisions taken by the large countries, but without having any say on the monetary policies of those countries. Now, all members have similar input to the monetary policy in the euro area."
Ms Hamalainen also entered the debate about future European integration, saying it was a way of trying to counterbalance the growing pressure from market forces, but in a healthy, coordinated manner. "As a longerterm vision, one should see European integration as a step towards better global co-operation and securing peaceful and balanced development in the whole world.
"The aim was - and still is - to preserve some of the key competencies of economic policy. This is a particularly important argument in favour of economic integration in Europe, as seen from the perspective of smaller countries, such as Ireland or Finland. On an individual basis, small countries - in practice, all European countries are small in global terms - are vulnerable and even powerless in the globalised world, but - as a group - they have greater strength and power."
