Euro hammered to an all-time low

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The Independent Online
THE EURO dropped to all-time lows against the dollar and pound yesterday as Europe's central bankers and politicians clashed over who was to blame for the currency crisis.

Wim Duisenberg, president of the European Central Bank (ECB), warned ministers, meeting in Cologne for an EU summit today and tomorrow, of the urgent need for economic reforms.

But the fledgling currency took a hammering after the central bank seemed to rule out any intervention to support the euro, as some politicians have urged.

Mr Duisenberg sowed further confusion in the financial markets when he disagreed with comments by two senior ECB council members. Bundesbank president, Hans Tietmeyer, and his appointed successor, Ernst Welteke, have said they were not happy about the euro's 12 per cent fall since its launch on 1 January.

Asked about their views, Mr Duisenberg said: "We are all agreed that we have to make efforts to speak with one voice because the song we are singing does not differ at all. But we need repetition sometimes to get the real harmony."

However, in remarks out of tune with the two Germans, he indicated that the weak euro was helping to stimulate growth in exports at a time when some member economies were struggling to mount a recovery.

As a result, the euro fell below $1.035, and 64.5 pence, both record lows.

The one bright spot yesterday was a circular to investors from Goldman Sachs saying the euro was now 20 per cent undervalued and was "very attractive". Such large currency misalignments usually went into reverse quite quickly, the investment bank said.

Mr Duisenberg issued an urgent warning to EU member states to take "decisive structural measures" to reform economic policy. This was directed at Germany and Italy, whose sluggish growth is dragging down the rest of the EU. He said increased flexibility in the jobs market and in markets for goods and services, such as shop opening hours, were essential to tackle high unemployment. He refused to comment on whether the Employment Pact to be agreed in Cologne would be adequate.

His remarks will be taken as a clear message to politicians to get to grips with their economic problems and stop causing confusion by hinting at possible currency intervention by the ECB. Mr Duisenberg said he was not troubled by the controversial decision by finance ministers last week to allow Italy to relax its budget targets.

However, he insisted that the Stability and Growth Pact - the fiscal rules that underpin the euro - must be met.

The ECB left interest rates unchanged yesterday. Mr Duisenberg struggled to avoid giving any hints that the ECB is considering intervention, even refusing to say whether the issue had been discussed in substance at the council meeting.

He insisted that the currency would recover when the gap between the US and European business cycles narrowed.

"The euro is a currency firmly based on internal price stability and therefore has a clear potential for a stronger external value," he added.

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