International Monetary Fund managing director Mr Horst Kohler gave an upbeat assessment of the world economic outlook yesterday and predicted that the battered euro would stage a recovery on forex markets. Bank of England governor Mr Eddie George also talked up the medium-term prospects of the struggling currency.
Giving testimony to the European Parliament's economic and monetary affairs committee, Mr Kohler gave a strong vote of confidence in the European Central Bank's stewardship of the common currency, which has fallen in value by over a quarter against the dollar since its inception 22 months ago.
"It is clear that the euro is undervalued and this poses problems," he said. "This misalignment needs to be corrected. "This misalignment needs to be corrected. But dramatisation is not productive. There will be no reversal."The German, appointed to his IMF post earlier this year, said the ECB, which has intervened unilaterally on currency markets in recent days to support the euro, was "doing a good job under difficult circumstances".
Mr Kohler also indirectly criticised European politicians for attacking the ECB's leadership after bank president Mr Wim Duisenberg was perceived to have damaged the currency with unguarded public comments playing down the likelihood of intervention.
"The political debate in Europe should concentrate on accelerating the agenda of structural reforms and on clarifying the future process of European integration and European Union enlargement." he said.
Mr George said the euro should recover at some point over the next two years. In response to questions after a speech to the Confederation of British Industry's annual conference, he said: "I am confident that at some point fundamentals will reassert themselves."
He said the purpose of the recent intervention by the ECB had been to pose the question whether long-term investment flows to the US - in his view, the primary cause of the euro's weakness - would dry up.
Commenting on the market's reaction to the latest bout of intervention, George said: "The market is still pondering that question."
