Yen in the firing line at eurozone finance ministers meet
2007-02-25

Category Japanese Yen Fiscal Deficit Group of Seven Exchange Rate Nations Italy Poland Germany Belgium Luxembourg City Warsaw Brussels Rome People Romano Prodi Category Bank of Japan

Finance ministers from the 13 countries sharing the euro were due on Monday take stock of growth in their combined economy amid concerns that the yen's weakness is hurting their exports.

The Japanese currency hit a new low against the euro on Thursday of 159.61 yen before firming up slightly on Friday.

The exchange rate question "will certainly be addressed Monday evening," said a source close to Luxembourg Prime and Finance Minister Jean-Claude Juncker, who chairs monthly meetings of eurozone finance ministers.

Juncker is due to "debrief" colleagues about a meeting of finance ministers from the Group of Seven most industrialised nations two weeks ago in Essen central Germany, where Japan assured its European partners the yen would pick up strength.

Despite such assurances and an increase in the Bank of Japan's interest rates, the yen has so far failed to recover.

After the G7 meeting, several European ministers took diverging positions on the yen's weakness with Juncker sounding the alarm while Italian Finance Minister Tommaso Padoa-Schioppa said that exchange rates should be decided by markets.

The yen's weakness has become a hot topic in Europe because it makes Japanese exports, such as cars, cheaper on international markets, dealing a blow to competing European products and the broader economy.

With the eurozone economy growing at its fastest rate in six years, there are few other headwinds threatening to blow the economy off course, apart from a sudden oil price spike.

Booming economic growth has helped many EU countries that have struggled to meet European deficit rules to improve their finances thanks to unexpectedly strong tax revenues.

The eurozone ministers are to review each other's progress in using such revenues to improve the public accounts before further talks on Tuesday on the same subject with their counterparts from the 27-nation EU.

Special attention is likely to be paid to the Italian case, firstly because 2007 is a crunch year for Rome to cut its deficit to EU norms and given the current political crisis in the government.

"The 2007 budget has already been voted," a French diplomat said. "There is no sign of change in economic policy in Italy."

Although Prime Minister Romano Prodi's political future is uncertain, Padoa-Schioppa is expected in Brussels.

Recent data showed that eurozone growth was boosted at the end of 2006 in particular by strong performances in Germany and Italy, which had won the dubious distinction in recent years of being the "weak man of Europe" because of its sluggish growth.

"We believe the short-term fallout from the political crisis will be limited, given also that the recent improvement in public finances offers a precious cushion," said economists Marco Annunziata and Marco Valli at Italian bank Unicredit in a note to clients.

When eurozone ministers are joined by their other EU counterparts on Tuesday, Poland is likely to be called on to step up efforts to improve its finances.

The European Commission, which polices public finances in the EU, expects the Polish public deficit to reach 4.0 percent of output in 2007, far above a Polish forecast for 3.4 percent and an EU limit of 3.0 percent.

As a result, Poland's EU partners are likely to urge Warsaw to cut its deficit in line with the EU rules by the end of this year.

"There is a pretty unanimous wish for Poland to do better," said one diplomatic source. "A number of delegations believe that Poland is not doing enough to reduce spending and make structural reforms."