The decline of the euro is becoming a familiar theme on international markets. Yesterday, the currency broke below 93 US cents for the first time in European trading and remained under pressure in the US. Even if the European Central Bank (ECB) increases interest rates again at its fortnightly meeting this week, market analysts do not believe the currency is set for an early rebound.
The euro's weakness has left the ECB in an unenviable position. If it steps into the currency markets to try to support the euro, then it may be accused of panicking. If it does not intervene, critics will say it does not care. A quarter of a percentage point interest rate increase this week is already expected in the market. If the bank were to announce a larger increase in a bid to support the currency, then it might endanger the economic recovery now underway in the main Continental EU markets.
There is no obvious cause of the latest selling pressure on the currency, with the euro again subject to the general negative sentiment that has dogged it since it was created. Investors remain convinced that the US economy will continue to perform more strongly and are therefore buying dollars. Meanwhile, doubts remain about the pace of recovery in the euro zone - Ireland's strong growth rate is very much the exception. It is really just a continuation of the factors which have caused the euro to drop 20 per cent in value against the US dollar over the past 16 months.
The fall of the euro is particularly unwelcome from the Irish viewpoint. The exposure of the Republic to the weak currency is much greater than that of the main euro zone economies, as exports and imports constitute a much greater part of our economic output. The renewed fall of the currency threatens to push up the price of all imports from outside the euro zone. This will add to inflationary pressures at a time when the Government had hoped that the rate of increase in the consumer price index was peaking at around 4.6 per cent and would decline during the year.
The weak euro is also, of course, good news for companies exporting outside the euro zone. Those selling to the US and the UK have benefited from a huge boost to their competitiveness over the past year. However, with the economy already growing very rapidly, this further boost to export activity is unwelcome.
The ideal development from the Irish viewpoint is for a gradual strengthening of the euro in the months ahead, which would act to reduce both inflationary pressures and the rate of economic growth. Unfortunately, there is little that the ECB can do to boost the currency in the short term. It will probably nudge up interest rates a few more times this year, in an attempt to stop a rise in the general euro zone inflation rate. But aggressively trying to support the currency in the market would be a doubtful tactic. The ECB would need to time its intervention very well if it is to have any chance of success and the risk of an embarrassing failure would be considerable.
For the Government, any further rise in the rate of inflation would add to emerging pressures on public-sector pay. It is essential that the terms of the new national agreement be adhered to and that higher inflation does not become embedded in our economy through an explosion in wage cost. If this were to happen, the economy could not continue to outperform the European average, as it has done so spectacularly in recent years.