Yesterday’s Daily Telegraph carries contradictory signals about the €uro. Ignoring an interview of Gerhard Schroeder the German Chancellor, I notice a report – tucked away in the Business section – that the €uro “Stability Pact” is on the verge of collapse as four of the 12 euro members break ranks to run up public sector deficits beyond the 2.5 per cent of GDP limit. France, Italy and Portugal look set to copy Germany in this trend. This is flatly contradicted by the exchange rate evidence: the euro has risen sharply since March against both the US dollar and the pound sterling.
On the one hand I tend to look at the exchange rate: if it rises above 1 US dollar then the Eurozone is probably doing something right (or the rest of the world is going to pot faster). On the other hand the reporting of the euro money supply is noteable by its absence. If the Stability Pact fails, the orthodox view is that the €uro will break up.
Yet the orthodox view of the pound when it broke out of the Exchange Rate Mechanism in September 1992 was exactly the same as the orthodoxy on the €uro. The currency would dive, inflation would take off etc.
