Euro will be Dragged Slowly into Currency War

Keeping out of the currency war was always going to be difficult.
And now it looks as though the euro zone is gradually being dragged in.
The region simply can't afford to remain aloof.
Its economy isn't strong enough to withstand a currency that is head and shoulders above the value of the currencies of its major competitors.
If a strong euro persists, euro-zone exports will suffer and the euro zone's economic recovery will be put even further at risk.
The depth of the problem facing policymakers in the euro zone was brought home by the latest economic growth figures. These didn't just show contractions in the economies of the usual debtor suspects but also showed that even Germany and France are suffering much more than anticipated.
Optimists continue to hope that a combination of a global upturn and an increase in demand for euro-zone exports will help to lift these economies out of the mire as we head deeper into 2013.
But that seems less and less likely. If euro-zone GDP shrank by 0.6% in the fourth quarter of last year when the euro was considerably weaker than it is now, what chances do many of the region's economies have in the first quarter of this year with the euro up at current levels?
To some extent, these concerns were reflected in the economic assessment made by European Central Bank President Mario Draghi after the latest policy meeting and with his remark Friday that the growth data were more negative than expected.
There is little sign, however, that the ECB plans to do anything about this just yet. Mr. Draghi himself was quick to point out that there is little sign of deflation and that interest rates are already "very low indeed."
Perhaps of more interest were reported remarks made by arch-hawk Jens Weidmann. As would be expected, the Bundesbank president stated that the ECB isn't about to cut interest rates just to weaken the euro.
He also said that the single currency isn't seriously overvalued.
On the one hand, that might all sound rather reassuring. On the other, Mr. Weidmann is acknowledging that the currency is trading above fair value.
So is the ECB more likely to do anything to bring the euro down now?
With elections in Italy later this month likely to inject some new political uncertainty into the performance of the euro, the ECB may not have to do anything at this stage. Fear that Italy will end up with a hung parliament and a government unable to pursue key structural reforms could well trigger another dose of euro weakness all on its own.
But if that doesn't happen, policymakers may have to be more proactive. ECB vice president Vitor Constancio warned Thursday that ECB rates could well turn negative.
So although the euro zone may show little appetite for joining in with a competitive devaluation, and with Mr. Draghi himself describing talk of currency war as inappropriate and self-defeating, he and other euro-zone policymakers may soon find they're having to take part if only to prevent the euro zone from sliding back into recession.
This expectation would certainly help to explain why after such a strong performance earlier this year, the euro is now prone to sudden losses.