Euro undervalued says IMF chief

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The Independent Online

As the euro slid to new lows Wednesday, the head of the International Monetary Fund said the currency had fallen too far, but any effort to prop it up should be well thought out rather than a panicky intervention in currency markets.

As the euro slid to new lows Wednesday, the head of the International Monetary Fund said the currency had fallen too far, but any effort to prop it up should be well thought out rather than a panicky intervention in currency markets.

"There is no doubt that the euro is undervalued, heavily undervalued," IMF Managing Director Horst Koehler told reporters ahead of the annual meetings in Prague of the IMF and its sister institution, the World Bank.

Asked whether finance ministers from the rich G-7 nations, who meet here on Saturday, should get their central banks to intervene, Koehler said it would be best for Europeans to work to bring the euro back to a more realistic value against the U.S. dollar and the Japanese yen. He did not rule out concerted intervention, however.

"In my mind is it also clear that intervention cannot be a taboo because it's part of the instruments any central bank or government has available," Koehler said.

"But interventions have to work, and this is the issue," Koehler said. "Less talk and more coordinated preparation is the issue."

About the time Koehler was speaking, the euro, which is used by 11 nations in the European Union, plunged to new lows, hitting below 84.65 U.S. cents and falling to 90.36 yen. Oil prices are also rising to levels unseen since the Iraqi invasion of Kuwait in 1990, spurring protests across Europe as people see their fuel bills soar - and creating uncertainties about the outlook for global economic growth.

But Koehler urged people not to panic, saying the world should stay on course for healthy growth despite any slowdowns caused by expensive oil.

"Oil prices certainly cast a new shadow on the economic outlook," Koehler said. But he added: "There is no need to traumatize or even panic - I do believe the world economy will be on track."

The IMF on Tuesday predicted the global economy can grow by 4.7 percent this year and 4.2 percent next year, but economists acknowledged they came up with these predictions before the recent spike in crude oil prices and said the oil market could shave up to half a percentage point off of the projected growth.

The big international lending institutions face rising opposition from protesters who see economic globalization as a threat to ordinary people everywhere. Thousands of demonstrators are expected to take to the streets of Prague in the next few days, but Koehler insisted the IMF is working on a better approach to lessening the gaps betweeen the world's rich and poor, and it will seek to become more open in its operations.

Koehler said by the end of the year, the fund hopes to put 20 poor nations on the path toward relief from their crushing debts - which many in the Third World complain is holding them back.

Some in the West say debt relief should only be granted in places where there is a credible plan for economic reforms that can benefit all.

"Debt relief is an important element to fight poverty, but it is no quick fix," Koehler said. Greater dialogue with poor nations, who find it hard to have their voices heard in the 182-member IMF, can bring about better policies, he said. Turning to the economic mess in Russia, Koehler said the international lenders wanted to see more deeds than words on battling corruption.

Asked if he should hold rich Western nations to the same standard of acting rather than talking when it came to fighting poverty in Africa, Latin America and Asia, Koehler said he would.

Koehler said fast-developing global financial markets create both the opportunity for Third World growth as well as the risk of more crises, such as the currency collapses that threw Asia into economic turmoil in 1997-98. The key is balancing the upside with the downside, he said.

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