Surging Euro Presents E.C.B. With a Dilemma

FRANKFURT — European policymakers appear to have contained economic destruction from the pandemic by administering a strong dose of monetary policy, government stimulus, and restrictions on travel and gatherings. But the measures came with an unwelcome side effect.

The euro has risen 10 percent against the dollar since March, a vote of confidence by investors that also creates big problems for European exporters. Their products automatically become more expensive for customers who pay in other currencies, putting them at a disadvantage against foreign rivals when sales are already depressed and competition is intense.

For the European Central Bank, which is meeting Thursday to discuss monetary policy, the stronger euro is yet another headache. The bank’s Governing Council is not expected to make any changes to its stimulus program, which is already enormous. But Christine Lagarde, the central bank’s president, is likely to be bombarded with questions about the euro and the dollar when she holds a news conference Thursday afternoon in Frankfurt.

Ms. Lagarde will be extremely cautious about what she says. The dilemma that she and government policymakers face is that any action to weaken the currency might be interpreted as a violation of the de facto nonaggression pact among the world’s largest economic powers not to provoke currency wars. Deliberate attempts to manipulate currency rates are regarded as a zero-sum game that helps one economy at the expense of others.

An unfavorable exchange rate is the one problem that central bankers are not allowed to do anything about — at least not openly.

Philip Lane, the European Central Bank’s chief economist, created a furor last week, and caused the euro to weaken, when he said at an online forum that the exchange rate “does matter” to policymakers. Even though he was stating the obvious, seemingly innocuous statements can have unintended power when they come from a central banker.

The economic pain when a currency’s value rises is real.

“Fundamentally every change in exchange rates is a change in price and competitiveness,” said Ralph Wiechers, chief economist at the Mechanical Engineering Industry Association, which represents mostly midsize German manufacturers.

Amid increasingly sophisticated competition from China, he said, “the exchange rate advantage will be exploited in the battle for contracts.”

Europe has been here before. The euro hit 1.49 to the dollar in 2011, when strong growth prompted the European Central Bank to raise interest rates, compared with 1.18 euros to the dollar on Wednesday. But the most recent surge in the euro, which was at 1.07 when the pandemic reached Europe in March, comes during the worst downturn on record. Output in the eurozone fell 11.8 percent from April through June, according to revised figures published Tuesday.

Economists expect to see a sharp rebound during the quarter now underway, but they say economic activity will remain well below what it was before lockdowns began.

If the economic outlook worsens, the central bank could decide to do even more to push down market interest rates. That would also tend to weaken the euro. The threat of deflation — a destructive decline in prices — would provide another justification for central bank action. A strong euro contributes to the risk of deflation because imported goods become cheaper for European buyers.

Annual inflation in the eurozone was minus 0.2 percent in August, according to official figures. But the European Central Bank has already committed to pumping as much as 1.35 trillion euros, or $1.6 trillion, into the economy as part of a program to combat the effects of the pandemic. There are limits to how much more it can do.

The euro has been rising in part because investors think Europe is recovering well from the economic effects of the pandemic, and they have been buying euros to invest in European stocks.

At the same time, the dollar has been weakening because of interest rate cuts by the Federal Reserve and the perception by investors that the United States is struggling to deal with the pandemic. Uncertainty about the outcome of the presidential election in November may also be weighing on the dollar.

Even before the pandemic, European exporters were suffering from trade tensions. The Trump administration has imposed tariffs on European steel and aluminum, and there has been a proliferation of hidden trade barriers such as regulations in countries, like China, that hinder foreign companies.

No matter what the European Central Bank does, many export companies are expected to go bankrupt, particularly in countries that have been hit the hardest by the pandemic and its economic impact, like Spain and Italy.

Still, Mr. Wiechers said he did not want the central bank to try to weaken the euro. The bank should stay focused on its main task of keeping prices stable, he said. “For us,” he said, “it’s more about reliability than short-term measures.”

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