BRUSSELS, April 22 - A senior European Union finance official said on Tuesday that the rise of the euro would start to hurt the economy at some point, and that this pain threshold was closer than it had been less than a week ago. However, Johnny Akerholm also pointed out some benefits from the stronger currency, which had earlier gained one percent against the dollar and hit four-year highs against the yen. "At some point, which I cannot identify, no doubt the exchange rate is going to start to hurt," Akerholm, chairman of the Economic and Financial Committee (EFC) which prepares for EU finance ministers' meetings, told reporters after testifying before the European Parliament. "We are less (far) away (from that point) than we were before Easter," he added. The euro's appreciation tends to erode the competitiveness of euro zone exporters and the value of their foreign currency earnings.
The European Commission said last week the euro's gains had eroded euro zone producers' competitiveness by about 4.5 percent in the first quarter of this year and that cost competitiveness had deteriorated by 13 percent from a year earlier. Still, Akerholm, a senior Finnish finance official, said the the euro's rise on the foreign exchanges had reflected economic fundamentals and that its appreciation so far had been well balanced and not overly abrupt. It also had some advantages, he said. "The exchange rate has brought more purchasing power to European consumers...and also relieved the pressure on the ECB." But euro strength on the foreign exchanges meant global demand needed to be healthy. "For the euro area as a whole, what we would not like to see is (a situation) where the euro has a strong exchange rate and also weak external demand because the growth process is not taking off globally," Akerholm said.
GROWTH IN THE PIPELINE
Akerholm said he agreed with the European Commission's view that the euro zone economy should begin to pick up in six months and insisted that relaxing the European Union's Stability and Growth Pact on budget discipline was unlikely to help growth. "I am not so sure that the short-term idea about a flexible interpretation of the Stability Pact would really add to growth," he told the European Parliament. "Rather, (it) risks reducing confidence in the economy and risks reducing growth rather than adding to growth," he said. Nor was sluggish economic activity any reason to defer the structural reforms which would help growth in the longer term. "Times of slow growth would be the right time to implement measures we think are going to solve Europes's medium- and long-term problems," Akerholm said. He said it was not necessarily a lack of purchasing power that was leading to the weakness in private domestic demand in Europe but rather weak confidence. The EFC is composed of two representatives from each of the EU states, one from the treasury and the other from the central bank, plus senior European Commission and European Central Bank officials.//