Fund sparks row over euro intervention

A fierce war of words broke out over the euro yesterday after the International Monetary Fund called on the European Central Bank to intervene to prop up the beleaguered currency.

A fierce war of words broke out over the euro yesterday after the International Monetary Fund called on the European Central Bank to intervene to prop up the beleaguered currency.

The IMF's chief economist, Michael Mussa, warned that the euro was undervalued and that sustained weakness would hurt the international economy.

But the IMF's intervention provoked an angry response from the German government. "Michael Mussa should concentrate on his job instead of giving his advice to the European Central Bank," a government official told a news briefing in Berlin.

The IMF's comments did little to boost the euro, which plunged to a fresh lifetime low of $0.8477 in New York trading.

Mr Mussa had earlier told an IMF meeting in Prague that the financial markets had pushed the euro "somewhat too low relative to fundamentals".

"Circumstances for intervention are relatively rare, but they do arise." he said. "One has to ask 'if not now, when?'"

In its World Economic Outlook, the IMF said the euro's drop of more than 20 per cent against the dollar since January last year meant it now appeared "significantly misaligned" against the US dollar and the Japanese yen.

If the misalignment was sustained, the IMF argued, pressure on eurozone firms to restructure would decline, prolonged global trade imbalances might fuel trade protectionism and the European Central Bank's monetary policy would be complicated.

"Although the weak euro has helped to jumpstart an export-led recovery in the euro area in the aftermath of the 1998 slowdown, a sustained period of currency misalignment would have a number of adverse effects," the IMF report said.

The IMF said one risk was that a sharp rebound in the euro would cause a sudden shift of investment out of the traded goods sector as export competitiveness was stripped away. It said the depreciation of the euro had had a similar effect to a 2 per cent cut in interest rates.

There is growing doubt that the finance ministers of the Group of Seven industrial powers, who meet in Prague this weekend, will sanction concerted intervention to stem the single currency's decline.

Meanwhile, French Prime Minister Lionel Jospin and his Italian counterpart Guiliano Amato expressed concern about the current weakness of the euro currency. An official said they did not believe that the euro's current level correctly reflected the fundamentals of Europe's economy.

The German Chancellor, Gerhard Schröder, will discuss oil prices and the euro with Mr Amato at an annual bilateral summit later this week.