ECB's Bini Smaghi Says FX Intervention Can be Warranted at Times

(CEP News) Frankfurt - European Central Bank Executive Board member Lorenzo Bini Smaghi said intervention in FX markets can be warranted and called on Europe to move towards a common economic policy.

Speaking at a seminar in Brussels entitled "Towards a European foreign economic policy", Bini Smaghi gave arguments in support of the euro's flexible exchange rate, saying that such a system has allowed the ECB to focus on price stability rather than FX movements.

Nevertheless, he added that despite the euro's flexible exchange rate system, policy-makers still have a role to play in FX markets.

"Exchange rate markets are prone to episodes of overshooting and undershooting," the central banker noted. "Public intervention - in the form of public statements or even outright interventions in FX markets - may thus be warranted."

However, Bini Smaghi warned against using the exchange rate to gain a competitive advantage.

"Using the exchange rate as an instrument to gain a competitive advantage over others may fuel resentment and stoke protectionist measures," Bini Smaghi said.

He also said verbal discipline is needed regarding FX and that he refuses to comment on current exchange rates, adding that only the ECB and Euro group presidents should make such comments.

Bini Smaghi added that adopting the euro has been the best FX decision Europe has taken, and that the currency has helped shield the region from external turmoil.

Furthermore, the ECB member called on further unity within Europe regarding foreign economic policy.

"If Europe wants to punch in proportion to its economic weight, moving towards a common foreign economic policy is essential," Bini Smaghi said

Written by CEP News European Staff, eunews@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca

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