Euro weakness in 2022

Question 1: What was the main cause for the euro’s decline relative to the US dollar in 2022?

Question 2: Should the ECB respond to movements in the euro-dollar exchange rate of the nature observed in 2022?

Summary

The January 2023 CfM-CEPR survey asked the members of its European panel about the reasons for the euro’s deprecation against the dollar in 2002. A majority of 56% of panellists thinks that monetary policy differences were the main cause for the euro’s decline. Nearly 30% attribute the value of the euro to developments in the real economy. The panel was nearly unanimous (at 80%) that the ECB shouldn’t have responded to the euro’s devaluation. 

Background

The January 2023 CfM-CEPR survey asked the members of its European panel about the change in the value of the euro in 2022.

The Worst Year Ever for the Euro?

2022 marked an extremely turbulent year for the euro. Analysts have described it as the ‘worst year in the euro’s history.’ The EUR/USD exchange rate was at $1.137 at the beginning of the year, but broke parity for the first time in 20 years in July, marking a 20 year low. It reached a Year-To-Date (YTD) low of $0.960 on 27 September, following the indefinite shutdown of the Nord Stream 1 pipeline that month. Following the European Central Bank’s (ECB) 75 basis-point policy hike on 27 October, the euro has recovered above parity, and the EUR-USD rate reached at $1.07 at the end of the year.

While economies around the world have suffered the impact of an economic slowdown due to the pandemic and the Ukraine crisis, the effects of these events have been exacerbated across Europe this year. Three key factors have been identified as causing the depreciation of the euro in 2022:

  1. Europe’s heavy dependence on Russian energy and the associated economic slowdown brought about by the Ukraine invasion.
  2. The widening of the monetary policy gap between the Federal Reserve (Fed) and the ECB.
  3. The role of the US dollar as a ‘safe haven’ during times of financial and political uncertainty.

Russia’s invasion of Ukraine greatly weakened the global economy through disruptions in trade, and food and fuel price shocks, but these effects have been felt more strongly in Europe compared to the rest of the world. In its Autumn 2022 Economic Forecast, the European Commission (EC) predicted that most EU member states would enter into recession in the last quarter of the year due to high inflation, weak growth rates and elevated uncertainty. The over-reliance of large European economies such as Germany and Italy on Russian gas has also resulted in energy-driven inflation being significantly higher in Europe than other economies, notably the US. Inflation in Europe reached 10.6% in October compared to just 7.2% in the US. Additionally, an ECB paper found that the Ukraine invasion and associated energy price increase has significantly increased uncertainty in the euro area, which negatively affected GDP and domestic demand in the eurozone. With the energy crisis bringing the EU’s terms of trade to their lowest level in its history, the Euro’s depreciation relative to the dollar was an inevitable consequence of the Ukraine invasion.

Some economists have also argued that the impact of the Chinese economic slowdown has hit Europe more than the US, leading to a weaker euro. Daniel Lacalle argues that the Chinese slowdown was also putting downward pressure on the eurozone’s trade surplus, and consequently, the euro could no longer maintain its strength relative to the dollar.

Another driver of the euro’s depreciation is the relatively passive approach taken by the ECB to tackle inflation as compared to the Fed. The Fed adopted a more hawkish stance towards rising inflation, sending clear signals in June 2021 that it would increase interest rates to rein inflation under control. It increased interest rates in March 2022, which was followed by further, faster hikes. In contrast, the ECB defended its loose monetary policy until July 2022, when it increased interest rates for the first time. This ‘shallower’ path adopted by the ECB for their policy rates led to a widening of the interest rate differentials between the 2 countries, leading investors to flock from European to American assets. As a result, since the Fed’s first announcement in June 2021 that it might raise rates, the dollar has appreciated by roughly 20% against the euro. Some have suggested that the ECB’s soft stance is influenced by the high debt levels of some euro area economies. See also von Hagen (1999) for a historical perspective.

Another reason for a weaker euro is the perception that the US dollar is a safe asset, particularly in crisis times. US assets, especially Treasury bonds, are generally viewed as a ‘safe haven’. Investors therefore prefer to hold these assets during times of turbulence and uncertainty. This usually leads to an increase in demand for these assets during crises, putting upward pressure on the dollar. The Ukraine crisis witnessed a similar trend, with the US dollar strengthening for three straight sessions in the wake of the Russian invasion. Egorov and Mukhin (2021) argue that as the issuer of the ‘dominant’ global currency, the US is more insulated from foreign spillovers, and can also extract rents in international goods and asset markets, thereby benefitting from its global status.

A weak currency could be a desirable side effect if its weakness is caused by developments in the real economy. A CEPR paper by Beck et al (2022) found that during an exchange-rate depreciation, large banks with high net foreign currency asset exposure increase lending to export-intensive firms and small banks, and regions with such small banks experience higher output growth. Conventional economic theory also dictates that a weaker currency boosts exports. However, as this VoxEU column summarize, there is still widespread disagreement amongst economists regarding the sensitivity of exports to exchange rate fluctuations. Ahmed et al (2015) argue that the emergence of global value chains has led to a sharp decline in the elasticity of manufacturing export volumes to the real effective exchange rate. Tsyrennikov et al (2015) disagree, citing little evidence of a general disconnect in the relationship between exchange rates and exports and imports over time.

Some economists have argued that the weak euro has been an ineffective stabilization factor in this crisis. With supply chain disruptions and sanctions looming in the background, European businesses have been unable to take advantage of their price competitiveness  and profit from the lower real effective exchange rate (REER). Additionally, with imports becoming more expensive, a weak euro significantly exacerbates inflationary pressures in the economy, compounding an already-grave problem.

There is much disagreement as to whether the ECB should take steps boost the euro or whether international coordination is desirable. A paper published by the ECB in September 2021 found that due to globalization effects, the exchange rate pass-through (ERPT) to inflation has declined in the EU to at around 0.3%, compared to 0.8% in 1999. As such, an intervention in the forex market by the ECB may be a step ‘too far’. On the other hand, almost half of all cross-border loans and international debt securities are denominated in US dollars. Economists argue that if the currencies like the euro were allowed to weaken relative to the dollar, it could make debt repayment extremely difficult for the private sector, increasing the risk of debt distress. However, Ethan Ilzetzki (London School of Economics) argues that high income economies like the EU are much more hedged against this type of risk, and that a strong dollar could actually improve the balance sheets of some institutions.

Some experts have also cited the additional inflationary pressures created by a weak euro as a justification for the ECB to intervene and strengthen the euro. There have been suggestions of implementing another version of the Plaza Accord – instituting an agreement amongst global economies to coordinate to weaken the dollar, thereby relatively strengthening other currencies like the euro.

In this month’s survey, members of the CfM-CEPR panel of experts on the European macroeconomy were asked for the causes of the euro’s weakness in 2022 and whether a policy response is merited if euro weakness should return.

Question 1: What was the main cause for the euro’s decline relative to the US dollar in 2022?

Forty-one panel members responded to this question. A majority of 56% of the panellists think that monetary policy differentials were the main cause for the euro’s weakness in 2022. This majority strengthens slightly to 61% when weighing panellists’ responses by their self-assessed confidence levels. 29% of the panel attribute the euro’s decline to factors in the real economy.

Most panellists cite monetary policy differences between the Eurozone and the US as the primary cause behind the euro’s decline last year. Maria Demertzis (Bruegel) points out that “the real exchange rate [was not] different to historical values [in 2022]”, indicating that “real factors or indeed the war in Ukraine” could not be the driving factors for this phenomenon. Jagjit Chadha (National Institute of Economic and Social Research) provides a potential explanation for the ECB’s relatively dovish approach, claiming “a less aggressive response to emergent inflationary pressures and concerns about weak growth in the face of high levels of indebtedness may have acted to constrain the policy response.” Echoing these sentiments, Morten Ravn (University College London) highlights that “there were initial doubts about the ECB’s willingness to increase the policy rate in the face of "fragmentation risk" and continuing credit policies.” However, as put by Fabrizio Coricelli (University of Siena and Paris School of Economics), “with the tightening in ECB policy in the second half of 2022, the euro has recovered some of the lost ground,” proving that monetary policy differences were the main reasons behind the depreciation of the euro.  

Almost a third of the panel believes that real factors were responsible for the euro’s decline in 2022. Several panellists state the Russia-Ukraine war as a leading cause behind the depreciation. Omar Licandro (University of Nottingham) and Evi Pappa (European University Institute) claim that Europe’s “high energy dependence” on Russia – especially on “Russian fossil fuel imports” – has contributed significantly to the euro’s downturn. Jumana Saleheen (Vanguard Asset Management) provides another explanation, claiming that differences in growth expectations between the US and Eurozone were behind the depreciation. She states that amid fears that “[a] lack of gas [due to the Ukraine invasion] would bring European industry to its knees”, the US experienced a “positive terms of trade shock”, which made it “richer”. Along with a “strong post-Covid recovery” and “monetary policy differentials”, this resulted in investors expecting the US to “grow much faster” than the eurozone, leading to a stronger dollar. Lukasz Rachel (University College London) also shares the opinion that the US benefited from a “positive terms of trade shock”. However, he further states that “European economies dealt with energy disruptions better than expected”, and hence, “financial factors” may have played a key role in the euro’s decline – as suggested by Mukhin and Itskhoki’s research.

Paul de Grauwe (London School of Economics) offers an alternate view of the situation, warning that economists simply “did not know” why the euro-dollar rate moved in 2022. He warns against devising stories to justify the euro’s declining, stating “too many economists invent stories that appear to be plausible.”

We also asked Chat GPT this question. Here was its response: “I am sorry, my knowledge cut-off date is 2021, so I am unable to provide information on events that occurred after that date. However, there can be many factors that can cause a decline in the value of a currency, such as economic conditions, interest rate changes, political developments, or market sentiment.” The panel was reassured that it cannot (yet) be replaced by a computer.

Question 2: Should the ECB respond to movements in the euro-dollar exchange rate of the nature observed in 2022?

Forty-one panel members answered this question. The vast majority, 81% of the panel, think the ECB shouldn’t respond to exchange rate fluctuations of this sort. 14% of the panellists think the ECB should respond and these panellists were equally divided among those wanting to respond only in coordination with other countries and those willing to respond even unilaterally.

Most of the panel believed that the ECB’s focus should be on targeting inflation, not these exchange rate fluctuations. This view is summed up by Andrea Ferrero (University of Oxford): “The ECB should continue to focus on its inflation stability mandate and thus respond to exchange rate movements only insofar as inflation is affected.” Ethan Ilzetzki (London School of Economics) points out that as the “Eurozone economies were running large current account deficits”, the exchange rate simply did “what it was supposed to.” It forced European economies to “limit expensive energy imports or else finance it through greater exports or lower consumption of other imports.” Jürgen von Hagen (Universität Bonn) further claims that the ECB’s problem is not the exchange rate, but rather, its ability to “fend off political pressures from the member governments” and maintain its independence. Cédric Tille (The Graduate Institute, Geneva) echoed these sentiments, stating that the ECB should react to the exchange rate only “to the extent that the exchange rate connects to inflation” and that any response should be “an answer to price pressure, not the exchange rate itself.”

A small fraction of the panel supported ECB response to forex movements, either unilaterally or in coordination with other central banks. Richard Portes (London Business School and CEPR) expresses support for unilateral intervention by the ECB but argues that intervention would only be justified “insofar as exchange-rate depreciation might increase inflationary pressures or threaten financial stability.” Given that similar opinions were shared by panellists opposing intervention (such as Cédric Tille and Andrea Ferrero), most of the panel reached a consensus on when ECB intervention would be appropriate but disagreed whether current circumstances merited such intervention.

Jorge Braga de Macedo (Nova School of Business and Economics, Lisbon) also advocates ECB intervention, but stresses the need for coordination with other central banks. Citing historical reasons, he states: “Central bank coordination has been a feature of the international monetary system since the stagflation of the 1970s, and the creation of the euro has made it necessary especially when international political rivalries return, and war require NATO attention again. Unfortunately, it is not sufficient because of changes in patterns of international trade and investment and new security threats not seen since the 1970s.”

References

Ahmed, S, M Appendino and M Ruta, (2015), “Depreciations without Exports? : Global Value Chains and the Exchange Rate Elasticity of Exports”, World Bank Policy Research Working Papers.

Beck, T, P Bednarek, D te Kaat and N von Westernhagen, (2022), “The Real Effects of Exchange Rate Depreciation: The Role of Bank Loan Supply”, CEPR Discussion Paper 17231.

Bobasu, A and R De Santis, (2022), “The impact of the Russian invasion of Ukraine on euro area activity via the uncertainty channel”, ECB Economic Bulletin, Issue 4/2022.

Egorov, K and D Mukhin, (2021), “Policy implications of dollar pricing”, VoxEU.org, 19 November.

Gopinath, G and P Gourinchas (2022), “How Countries Should Respond to the Strong Dollar”, IMF Blog, 14 October.

Von Hagen, Jürgen (1999), chapter in Deutsche Bundesbank, eds., Fifty Years of the Deutsche Mark. Central Bank and the Currency in Germany since 1948, New York: Oxford University Press, 1999.         

Itskhoki, Oleg and Dmitry Mukhin (2022) “Sanctions and the Exchange Rate” VoxEU.org, 16 May 2022/

 

 

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Real factors Very confident
The timing and magnitude of monetary policy differentials can explain only a small portion of the euro's decline relative to the dollar. In contrast, the European economy was far more exposed to the Russian invasion of Ukraine than was the US. The Euro Area suffered its largest current account deficit in a decade and this is easily explained by the increased price of energy imports. This began reversing when oil prices declined, without any major change in monetary policy. Hear more on this in this podcast interview: https://directory.libsyn.com/episode/index/show/macromusings/id/24984384
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management Real factors Confident
The main reason for the fall in the euro was expectations that the US would grow much faster than the euro area, given the war in Ukraine. Euro area: large negative terms of trade shock from the war in Ukraine. It intensified in September, when Russian gas flows through the Nord Stream 1 pipeline ended. Fears grew that lack of gas would bring European industry to its knees and the block would suffer recession. USA: as a net exporter of oil and gas, the US experienced a positive terms of trade shock – that not many people talk about. But it is important. It has made the US richer. The US also experienced a strong post-Covid recovery supported by strong household balance sheets built up from pandemic stimulus payments, and a historically tight labour market.  High and rising inflation in both regions led interest rates to rise in both regions through 2022. But the Fed started earlier and hiked aggressively. Monetary policy differentials did also contribute to dollar attractiveness.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Financial factors Not confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Monetary policy differences Confident
The key factor is the effect of UIP on nominal exchange rates over a period of time. ECB was slower than the Fed to raise interest rates and has raised them less to combat energy shocks and their transmission to other prices. As a result, inflation is higher, and is expected to remain higher, for longer than that in the US. UIP tells us that this would cause the euro to depreciate relative to the US dollar.
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles Monetary policy differences Very confident
The ECB's more cautious policy rate hikes (relative to the Fed's response) were most likely a key factor behind the euro's weakness in 2022. This more timid ECB reaction reflects both real and financial factors: for example, the Russian war of aggression against Ukraine is having a more detrimental effect on real activity in Europe (than in the U.S.); similarly, the public finances of key Eurozone member countries remain very fragile, and could be destabilized by sharp interest rate hikes.
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS Monetary policy differences Confident
I would argue the main reason is the differential in interest rates. The ECB waited much longer than the Fed in raising rates. This is of course driven also by the perceptions regarding economic differences such as the stronger impact of the war and energy crisis on Europe.
Vincent Sterk University College London Real factors Not confident
Eran Yashiv's picture Eran Yashiv Tel Aviv University and CfM (LSE) Real factors Confident
War disruptions, gas issues were key driving factors
Łukasz Rachel's picture Łukasz Rachel UCL Financial factors Not confident at all
All three factors likely played a role. US is a net energy exporter so it actually experienced a positive terms of trade shock; quite the opposite for Europe. However, I think the perception has been more dire than reality -- European economies dealt with energy disruptions better than expected, and the catastrophic scenarios did not come about. Perhaps that is why the euro has straightened in recent months. Research by Mukhin and Itskhoki suggests financial factors are important, and my sense this episode is no exception. Monetary policy landscape is more subtle in the eurozone, and mon pol differences likely played a role too. Ultimately we're talking about exchange rates, so confidence in any decomposition remains low.
Stefan Gerlach's picture Stefan Gerlach EFG Bank Monetary policy differences Confident
With the economies in the US and the euro area impacted to different degrees by the Russian invasion of Ukraine, monetary policy divergences and exchange rate changes were inevitable.
Harris Dellas's picture Harris Dellas University of Bern Monetary policy differences Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Monetary policy differences Not confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Real factors Confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics Monetary policy differences Confident
David Cobham's picture David Cobham Heriot Watt University Monetary policy differences Confident
I put monetary policy differences first, but the other two are also important. If the Ukraine invasion had not occurred, the safe haven effect would then have been smaller or zero, but interest rate divergences could still have led to some euro depreciation. On the other hand if interest rates had not diverged but Ukraine had been invaded, the depreciation would, in my view, have been much smaller. But really an 'all of the above' answer would be more correct.
Evi Pappa's picture Evi Pappa European University institute Real factors Confident
I have answered real factors but I believe its a combination of factors with the war in Ukraine and the fact that Germany and other countries have relied heavily on Russian fossil fuel imports and also the more aggressive monetary policy in the US as being being the most important ones.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Other, none of the above, or no response Very confident
We just do not know. Too many economists invent stories that appear to be plausible. You may be interested my "Belgian Chocolate Theory of the Dollar". https://www.ft.com/content/165f8838-839c-11da-9017-0000779e2340
Giuseppe Bertola's picture Giuseppe Bertola Università di Torino Other, none of the above, or no response Confident
All of the above, jointly endogenous to war nearby.
Omar Licandro's picture Omar Licandro University of Nottingham Real factors Very confident
The Ukrainian invasion in a context of high energy dependence from Russia is the main cause. Brexit is also weakening both UK and the EU.
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Monetary policy differences Confident
real and financial factors were certainly at play but the most evident difference comes from monetary policy differences between FRB and ECB. While there are many examples of transatlantic differences in monetary policy since the creation of the euro, the coexistence of those with financial and real factors is new, as well as the renewed anxiety about the US debt ceiling, which is why my confidence level is Iower than it otherwise be.
Roger Farmer's picture Roger Farmer University of Warwick Monetary policy differences Confident
Maria Demertzis's picture Maria Demertzis Bruegel Monetary policy differences Very confident
We observe that the real effective exchange rate has not been different to historical values. Also, the nominla exchange rate has recovered a lot of its value vis a vis the dollar since september. So it is not the real factors or indeed the war in Ukraine to drive the changes.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Monetary policy differences Confident
The ECB has picked a different point on the trade-off between output and inflation stabilisation than the Fed. Maybe it had to for structural reasons. A less aggressive reponse to emergent inflationary pressures and concerns about weak growth in the face of high levels of indebtedness may have acted to constrain the policy response. And hence to the exchange rate depreciation.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Other, none of the above, or no response Not confident at all
Not sure whether we have the tools to quantify the impact of these different factors. I definitely do not have that expertise.
Philippe Bacchetta's picture Philippe Bacchetta Université de Lausanne Monetary policy differences Confident
Both safe haven and monetary policy factors were at play.
Philip Jung's picture Philip Jung University of Dortmund Real factors Confident
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva Monetary policy differences Very confident
Richard Portes's picture Richard Portes London Business School and CEPR Monetary policy differences Confident
Ugo Panizza's picture Ugo Panizza The Graduate Institute, Geneva (HEID) Monetary policy differences Confident
Nicola Fuchs-Schündeln's picture Nicola Fuchs-Sc... Goethe University Frankfurt Monetary policy differences Confident
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London Real factors Confident
Fabrizio Coricelli's picture Fabrizio Coricelli University of Siena and Paris School of Economics Monetary policy differences Very confident
The long run trend of dollar appreciation that started in 2008 is mainly due to the flight to the dollar as safe asset. The specific dinamics in 2022 appears mainly due to differences in monetary policy, both timing and size of policy rate changes. Indeed, aftervreaching its trough, with the tightening in ECB policy in the second half of 2022, the euro has recovered some of the lost ground.
John VanReenen's picture John VanReenen London School of Economics Real factors Confident
Natalie Chen's picture Natalie Chen University of Warwick Real factors Confident
Lucio Sarno's picture Lucio Sarno Cambridge University Monetary policy differences Very confident
Morten Ravn's picture Morten Ravn University College London Monetary policy differences Confident
I think there were initial doubts about the ECBs willingness to increase the policy rate in the face of "fragmentation risk" and continuing credit policies. Once the ECB starting signalling that it would increase rates, the Euro recovered. On the real economy side, we now see Europe - Germany in particular - coping much better without russian energy imports than feared by some. In combination, this hopefully signals that the economy will be less prone to a significant downturn than previously thought and that the inflationary pressures will be contained.
Andrea Ferrero's picture Andrea Ferrero University of Oxford Monetary policy differences Confident
If the ECB had increased interest rates more promptly, the Euro would have not depreciated as much. Yet, I'm not convinced that the ECB should have increased interest rates more promptly. The underlying causes of inflation (or at least their relative importance) are likely to be different between the Euro Area and the US.
Costas Milas's picture Costas Milas University of Liverpool Monetary policy differences Confident
Gernot Müller's picture Gernot Müller Eberhard-Karls-Universität Tübingen Monetary policy differences Very confident
Linda Yueh's picture Linda Yueh London Business School Other, none of the above, or no response Confident
Francesco Lippi's picture Francesco Lippi LUISS Real factors Confident

Question 2

Participant Answer Confidence level Comment
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management No Extremely confident
No because of the impossible trilemma. The impossible trilemma refers to the idea that an economy cannot pursue independent monetary policy, maintain a fixed exchange rate, and allow the free flow of capital across its borders at the same time. The ECB should not respond as it supports a floating exchange rate currency regime. If it were to intervene the ECB would have to give up its pursuit of independent monetary policy. Or it would have to intervene in capital markets, thereby stopping the free flow of capital across its borders. None of these options are desirable.
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York No Confident
Monetary policy should target inflation, not the exchange rate. This implies higher interest rates and a stronger euro.
Sir Charles Bean's picture Sir Charles Bean London School of Economics Yes, (even) unilaterally Confident
The path of monetary policy should be adjusted only in so far as the ECB judges that the euro depreciation affects the medium-term outlook for inflation.
Robert Kollmann's picture Robert Kollmann Université Libre de Bruxelles No Very confident
The ECB should focus on stabilizing inflation and real activity in the Eurozone.
Volker Wieland's picture Volker Wieland Goethe University Frankfurt and IMFS No Very confident
The ECB should respond to inflation and the inflation outlook. Of course, inflation dynamics will be influenced by changes in exchange rates. For example, a lasting depreciation is putting upward pressure on inflation. Thus, indirectly exchange rate changes will feed back into policy.
Vincent Sterk University College London No Confident
Eran Yashiv's picture Eran Yashiv Tel Aviv University and CfM (LSE) No Confident
Łukasz Rachel's picture Łukasz Rachel UCL No Confident
Focusing on maintaining monetary stability by using the monetary policy toolkit and enhancing financial stability with appropriate macroprudential and microprudential regulation should be sufficient. I worry about the long-term consequences of directly intervening in the exchange rate.
Stefan Gerlach's picture Stefan Gerlach EFG Bank No Confident
The ECB should focus on ensuring price stability even if that results in large changes in the exchange rate of the euro to other currencies.
Harris Dellas's picture Harris Dellas University of Bern No Very confident
The ECB should respond more strongly to inflation. This would help strengthen the EUR
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford No Very confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London No Confident
Nicholas Oulton's picture Nicholas Oulton London School of Economics No Confident
David Cobham's picture David Cobham Heriot Watt University No Confident
I'm assuming we are talking here about actual forex intervention. The ECB should of course respond to the inflationary implications of depreciation in its interest rate setting.
Evi Pappa's picture Evi Pappa European University institute Other, none of the above, or no response Not confident
If the ECB sees the depreciation of the euro as another factor affecting inflation through more expensive imports it should intervene even unilaterally. However, such an intervention could weaken exports and if the Chinese markets open up again, that would be detrimental for exports especially for Germany. Moreover with many countries in the Eurozone like Italy and Germany with new governments (political uncertainty) and/or high debt to GDP levels such movement could jeopardise financial stability.
Paul De Grauwe's picture Paul De Grauwe London School of Economics No Very confident
Omar Licandro's picture Omar Licandro University of Nottingham Yes, (even) unilaterally Confident
The ECB in the design of its monetary policy must consider large movements in the euro-dollar exchange rate, in particular when the FED is following a different approach to inflation
Jorge Braga de Macedo's picture Jorge Braga de ... Nova School of Business and Economics, Lisbon Yes, but only in coordination with other central banks Very confident
central bank coordination has been a feature of the international monetary system since the stagflation of the 1970s and the creation of the euro has made it necessary especially when international political rivalries return and war require NATO attention again. Unfortunately it is not sufficent because of changes in patterns of international trade and investment and new security threats not seen since the 1970s. The political difficulties of the US debt ceiling though not the first this century seem more threatening in a state of war.
Roger Farmer's picture Roger Farmer University of Warwick No Confident
Jean Imbs's picture Jean Imbs Paris School of Economics No Very confident
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research No Very confident
The ECB, as any other inflation-targeting central bank, cannot target the exchange rate as well as inflation. It must think about bringing domestically generated inflation back to a level consistent with price stability with a consistent interest rate strategy.
Maria Demertzis's picture Maria Demertzis Bruegel No Extremely confident
The value of a currency is an outcome not a target itself.
Wouter Den Haan's picture Wouter Den Haan London School of Economics No Not confident
I interpret the question to mean respond to just movements in the exchange rate that is not as a signal for inflationary pressure.
Philippe Bacchetta's picture Philippe Bacchetta Université de Lausanne No Confident
2022 was a complex year in terms of monetary policy decisions. The exchange rate was not a priority, beyond its inflationary impact.
Philip Jung's picture Philip Jung University of Dortmund No Confident
Cédric Tille's picture Cédric Tille The Graduate Institute, Geneva No Very confident
Exchange rate should per se be something the ECB reacts to. To the extent that the exchange rate connects to inflation, then an answer is fine, but it is an answer to price pressure, not the exchange rate itself.
Richard Portes's picture Richard Portes London Business School and CEPR Yes, (even) unilaterally Confident
Yes, but only insofar as exchange-rate depreciation might increase inflationary pressures or threaten financial stability.
Ugo Panizza's picture Ugo Panizza The Graduate Institute, Geneva (HEID) No Confident
Nicola Fuchs-Schündeln's picture Nicola Fuchs-Sc... Goethe University Frankfurt Other, none of the above, or no response Confident
Jürgen von Hagen's picture Jürgen von Hagen Universität Bonn No Extremely confident
The ECB's problem is not the exchange rate. It is the uncertainty about its independence, or, about whether it will be able to fend off political pressures from the member governments.
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London No Not confident
Fabrizio Coricelli's picture Fabrizio Coricelli University of Siena and Paris School of Economics Yes, but only in coordination with other central banks Very confident
However, highly unrealistic, as the key coordination should be with the FED.
John VanReenen's picture John VanReenen London School of Economics No Not confident
Natalie Chen's picture Natalie Chen University of Warwick No Confident
Lucio Sarno's picture Lucio Sarno Cambridge University Yes, but only in coordination with other central banks Confident
Andrea Ferrero's picture Andrea Ferrero University of Oxford No Extremely confident
The ECB should continue to focus on its inflation stability mandate and thus respond to exchange rate movements only insofar as inflation is affected.
Costas Milas's picture Costas Milas University of Liverpool No Confident
Gernot Müller's picture Gernot Müller Eberhard-Karls-Universität Tübingen No Very confident
Linda Yueh's picture Linda Yueh London Business School No Confident
Francesco Lippi's picture Francesco Lippi LUISS No Confident
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics No Very confident
The causes for the weak euro were real, Eurozone economies were running large current account deficits, and the exchange rate was doing exactly what it was supposed to do: force Euro Area economies to limit their importation of expensive energy, or else finance it through greater exports or lower consumption of other imports.