the overvalued euro

The euro is soaring, and not only against the US dollar. LSE economist Willem Buiter explains that the euro’s overvaluation is a direct result of excessively tight monetary policy, so can be corrected with loose monetary policy.

The euro has become a currency on steroids.  Its relentless nominal and real appreciation since the end of 2000 was briefly interrupted in the second half of 2008, but resumed with a vengeance during 2009. ….

It is time for the ECB [European Central Bank] to demonstrate that, despite all the evidence of recent years, it does not pursue an asymmetric, deflationist monetary agenda, but that it takes a violation of its price stability mandate in a downward direction equally seriously as a deviation in an upward direction.   If the ECB persists in acting in a willfully asymmetric manner, its cherished independence will be taken from it.  The letter of the Treaty will provide no protection against popular anger and political opportunism.

Willem Buiter, “Time for the ECB to get serious about the overvalued euro”, Maverecon, 18 October 2009.

This is a very informative post, with three helpful charts. Financial Times blogs (I think!) are ungated, unlike regular columns published in the print edition. Willem Buiter is former chief economist (2000-2005) of the European Bank for Reconstruction and Development.

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