The successful launch of the euro has rapidly stimulated an international debate on how it should relate to the other major world currencies - the US dollar and the Japanese yen. Should they float freely, be managed by the relevant central banks, or should there be more explicit target zones or bands within which their values would move?
The argument is driven by national and regional interests as well as theoretical concerns. Yesterday, for example, the Japanese central bank intervened on the markets in an attempt to drive down the yen's value against the weakening dollar. The chief cabinet secretary, Mr Hiromu Nonaka, said a stronger yen is not in the interests of the Japanese or world economies. He spoke a day after the Japanese prime minister, Mr Keijo Obuchi, met the German chancellor, Mr Schroder, to press home his case for closer co-ordination of exchange rates. Mr Obuchi prefers this phrase to the much more contentious target zones advocated by the German finance minister Mr Oskar Lafontaine after he came to power, but from which he has retreated following sharp criticism from US experts especially. US officials yesterday warned that Japanese-US tensions are set to escalate rapidly, as automobiles, steel, flat glass and insurance exports surge in US markets.
German and French ministers have made it clear they are against too strong a euro on world markets for fear it would stifle EU exports and growth. This has put them in conflict with the European Central Bank, whose president, Mr Wim Duisenberg, believes it is the bank's role to direct exchange rate policy. Political interference, he believes, would be counter-productive. Whatever the merits of Mr Duisenberg's case, it has not prevented Mr Lafontaine and those who think like him pursuing their case politically. They have set up a study group on the question within the Euro-11 group of finance ministers and intend to pursue it through the Group of Seven industrialised countries, which Germany currently chairs. One way or another, therefore, this debate is set to continue.
There was inadequate preparation for the international effects of the euro, probably because of scepticism in the US about its success. It is much too early to judge how rapidly international reserves are likely to shift towards the new currency but it is surely significant that already discussion has started in Germany and Belgium about whether the notes and coins should be introduced earlier than the agreed date of January 1st, 2002.
The debate on currency values and how to manage them is part of a wider and developing international discussion on how best to regulate the international economy. There has been increasing dissatisfaction with the Bretton Woods institutions after the Asian economic crisis and the continuing indebtedness of the poorest economies to the richest ones. Ideas such as taxing capital flows or building a social clause into the World Trade Organisation agreements are being given a new hearing, stimulated by the new social democratic governments in the EU. Keynesian ideas of demand management, discredited at national level, are being revived in a regional or global setting. Target zones for currencies are part of this discussion. Even if they are found technically deficient, the political impulse behind them will not go away.