Europe can no longer afford to ignore the euro’s exchange rate

Bonjour! This is Anna, writing from London. Today is 7 September, and here is your weekly update on what matters most in the European Union.

This week’s briefing is written by Eric Monnet. Eric Monnet is an economic historian, Professor at the EHESS and Paris School of Economics, and CEPR research affiliate. He has held visiting and research positions at Columbia University, Rutgers University, Ghent University, the IMF, the think tank Bruegel, and previously worked as an economist at the Banque de France.

A big thanks to Joe Pearn for his help putting this edition together. Feel free to share this newsletter with friends and colleagues, follow us on LinkedIn, and feel free to reach out at contact@whatsupeu.co

Best,

Anna Morin

Foreign-exchange intervention has returned to the toolkit of the world’s leading economies. China has long managed the renminbi to resist unwanted appreciation. Now the United States has revived intervention as a geopolitical instrument, as it regularly did until the 1990s.

Europe cannot help but have a plan. Not because it ought to manipulate the euro, but because it remains institutionally unprepared for a world in which other powers increasingly deploy exchange rates in pursuit of economic and strategic objectives.

What the US intervention on the foreign exchange market means

Washington joined Tokyo’s effort to support the yen on July 31. Japan supplied most of the financial firepower, while the American contribution appears to have been smaller but politically potent. The US operation reportedly involved selling euros to purchase yen.

This was a Treasury intervention, through its Exchange Stabilization Fund. It was not a monetary-policy decision by the Federal Reserve, which only executed Treasury-directed transactions as the government’s fiscal agent.

This distinction matters because exchange-rate and monetary policies may pull in different directions. The government may want a stronger yen to limit disorderly capital movements, reduce pressure on US bond yields, or assist a strategic ally. But the yen’s weakness largely reflects the interest-rate gap between Japan and the United States. Supporting it through intervention, while American monetary policy keeps yields high, treats a symptom without addressing the underlying policy mix.

The consequences do not stop at Japan and geopolitics. Selling euros to buy yen directly affects the euro’s exchange rate. Moreover, Japanese sales, or anticipated sales, of US Treasury bills can move American yields, which are transmitted rapidly to European bond markets. Currency movements also change euro-area import prices, competitiveness, and ultimately inflation.

The ECB must therefore incorporate foreign interventions into its monetary-policy assessment even when it was neither consulted nor warned. But the response cannot only be through ECB’s own monetary policy. To maintain an autonomous monetary policy, Europe should be able to respond to exchange rate policy with tools that can potentially isolate exchange rates from monetary policy (although a full isolation can never be achieved in practice).

Does Europe even intervene on the euro’s exchange rate?

Europe has never established a genuine exchange-rate policy. Under Article 127(2) of the Treaty on the Functioning of the European Union (TFEU), conducting foreign-exchange operations is a task of the Eurosystem.

But the political authority lies elsewhere.Article 219 TFEU provides that the Council may conclude formal exchange-rate arrangements. In the absence of such a system, it may “formulate general orientations for exchange-rate policy” on a recommendation from either the Commission or the ECB. The ECB must be consulted, and every arrangement must respect its primary objective of price stability. The EU does not have an Exchange Stabilization Fund, so the implementation will always involve the ECB.

No Council agreement or general orientation has ever been adopted. In this vacuum, the Eurosystem retains the capacity to intervene unilaterally or with other central banks. But capacity is not strategy, and legal possibility is not the same as democratic legitimacy.

The ECB hasintervened in only two historical episodes: to support the newly created euro in 2000, and in the internationally coordinated operation following Japan’s earthquake and tsunami in March 2011. Thelatter was explicitly agreed by G7 finance ministers and central-bank governors. Since then, nothing.

Intervention is not equivalent to fixing an exchange-rate target or an exchange rate agreement. Nor can it permanently override monetary, fiscal, and trade fundamentals. But it can dampen disorderly markets, signal policy objectives, and buy time, especially when coordinated.

Europe should therefore define in advance the circumstances in which intervention might be warranted, the objectives it could legitimately pursue, and the process for coordination among the Council, Commission, and ECB.

The Missing Half of Euro Power

This is also part of the wider debate about the euro’s international role. The ECB cannot internationalise the currency by itself. Europe needs deeper capital markets and a larger supply of liquid, highly rated common debt, a European safe asset capable of competing with US Treasuries. The ECB itself now acknowledges that the euro’s reserve-currency role is constrained by the limited and fragmented supply of such assets.

The contrast is equally stark in the use of central-bank swap lines. The United States and China have built extensive networks that provide foreign central banks with access to their currencies while also serving broader strategic objectives. Europe’s approach remains markedly more cautious: access to ECB liquidity arrangements is narrower and more conditional. Such a network of loans between central banks cannot be treated as an instrument of monetary policy alone; it inevitably carries geopolitical and fiscal implications.

The ECB is right to hesitate before entering this territory without firm political backing from Europe’s legislative and executive institutions. But a major central bank cannot ignore a world increasingly shaped by swap lines and foreign-exchange intervention. A genuinely independent, and democratically legitimate, central bank can operate only under a clear mandate and in close coordination with the other arms of economic and foreign policy.

The United States has both an exchange-rate authority and a deep sovereign-debt market. Europe has a global currency but neither an explicit exchange-rate doctrine nor a comparable common safe asset. In a more interventionist and geopolitical monetary order, that institutional incompleteness is becoming dangerous. The Council and Commission should close the gap before the next crisis forces the ECB to improvise.

CEUTA • Prime Minister Pedro Sáncheztold Congress on Thursday that no intelligence report anticipated the scale of July’s Ceuta crossing, dismissing a leaked police document that accused Moroccan security forces of orchestrating the arrival of more than 70,000 people.

Spain’s national police chiefdenied any such report exists, saying investigators had been barred by a judge from briefing him. Morocco also rejected the claims, noting Morocco had cooperated in returning most migrants within 48 hours.

EEAS OVERHAUL • Eleven Member States, led by France and Germany,sent EU foreign policy chief Kaja Kallas a letter with five steps to speed up foreign policy decisions, including a push for wider use of qualified majority voting.

In a separate one-pager, France and Germany reportedly went further,proposing to bring much of the EEAS under Commission oversight and make Kallas an executive vice-president overseeing trade, development and defence policy, while leaving crisis-management staff inside the EEAS.

Kallas addressed the push after chairing so-called Gymnich-format talks, the twice-yearly informal EU foreign ministers’ meeting. She said ministers had a good discussion on "where our working methods prevent us from exercising the influence that Europe should have."

EU INFLATION HIGH • Euro area annual inflation is expected to reach 3.3% in August, up from 2.9% in July and its highest since 2023. Price increases are driven almost entirely by energy costs after renewed disruption to shipping through the Strait of Hormuz.

In June, theECB raised its deposit rate to 2.25%, its first hike in three years. The central bank cited inflation risks from the Middle East energy shock, then held rates steady in July. Its next policy meeting will take place on 10 September.

GERMANS x WORK • Executives at Mercedes-Benz and toolmaker Stihl arecalling for German workers to return to a 40-hour week without extra pay. "Labour has become too expensive here by international standards," said Mercedes-Benz supervisory chair Martin Brudermüller.

German manufacturing employment has been shrinking by up to 15,000 jobs per month. At €49.50 an hour, German labour costs run 47% above the EU average, more than triple Hungary’s. Industrial output has fallen more than 15% since 2017, hit by high energy prices and Chinese competition, per the union-funded IMK institute.

IG Metall, Germany’s largest union, argues the current 35-hour week already barely exists in practice and warns longer hours without more pay would cost more jobs than it would save. Formal pay talks begin in October.

BERLIN BLAMES MOSCOW • Germany formallyblamed Russia this week for a failed drone attack that targeted Ukrainian cargo planes at Leipzig-Halle airport in early August, and moved to punish Moscow in response. Foreign Minister Johann Wadephul closed the Russian consulate in Bonn and shut the Russian House in Berlin, both long seen as hubs for espionage and propaganda, while tightening entry rules for Russian nationals.

EU foreign policy chief Kaja Kallassaid the attack bore "all the hallmarks of state-sponsored terrorism," as EU foreign ministers meeting in Wicklow closed ranks behind Germany’s attribution of the plot to Russia.

Moscowretaliated in kind. Foreign Minister Sergey Lavrov ordered the closure of various Goethe-Institut cultural centres, while President Vladimir Putin dismissed Berlin’s evidence as "planted."

• In Foreign Policy, Stephen Walt identifies Russia’s stalled Ukraine war and America’s failed Iran strikes as signs of a return to "defence dominance." Advancements in drones, missiles, and surveillance now allow even weak states to effectively deter stronger powers, a trend UN Secretary-General António Guterres notes has severely limited great powers’ ability to impose their will.
• Historian Georges Vigarello, writing in Le Grand Continent, tracks five centuries of Western individualism, defining it through emancipation, singularity, and interiority. He warns that the West’s prized autonomy creates new dependencies and ecological limits, while fueling Russian narratives of a "decadent," over-individualised West.