No Need to Fear a Strong Euro: Facing the World Economy’s Gordian Knot in Europe

The appreciation of the euro over the last two years –a trend likely to continue into the future, despite a recent slip from US$1.29 to US$1.21– is not only a positive development for the European economy but also a prerequisite for a sustained period of global growth.

The world economy cannot recover and begin a renewed cycle of strong sustainable growth until the remaining international macroeconomic imbalances –legacies of the 1990s’ US-driven boom– have been unwound. Only dollar decline and European economic reform can hope to achieve the necessary adjustment. Europe would be well-advised to take advantage of the new window of opportunity for cooperation to resolve the Stability and Growth Pact controversy and to forge ahead with the Lisbon Agenda. While many may be sceptical that this can be rapidly achieved in Europe, it nevertheless remains a better bet than passively expecting the corollary adjustments to be made in the US on fiscal policy or in Asia with respect to currency policy. In the end, if the European project is to deliver on much of its long-awaited promise, the EU must assume its new role as a critical engine of world economic growth.