BERLIN (Thomson Financial) - European finance ministers expressed very little concern over the recent strength of the euro, instead seeing it as a positive signal on the buoyancy of the euro zone economy.
The overwhelming message at the informal meeting of finance ministers in Berlin held over the weekend was of confidence in the European economic recovery and comfort about the level of the euro, despite it trading at two-year highs against the dollar and close to record highs against the yen.
Euro group president Jean-Claude Juncker spoke of growth in the euro zone improving and described the economy as 'robust', while EU economics and finance commissioner Joaquin Almunia stressed that the economic recovery has been 'broad based'.
'The common theme seems to be the unexpected strength of activity,' said Investec economist Philip Shaw.
'There seems to be a universal consensus that the euro zone economy is very strong and, given the strength of the euro and the recent German VAT hike that is quite remarkable,' he said.
Ministers saw no reason to express alarm over the strength of the euro, which many commentators had expected ahead of the meeting. Instead, many saw it as a good opportunity to praise the success of the region's economy.
Both Belgian finance minister Didier Reynders and Dutch finance minister Wouter Bos said the strong euro reflects a robust economy and is far from being a cause for concern.
'If you have a strong currency it reflects a strong economy ... A strong euro and a strong economy, that's the best scenario,' Reynders told reporters on the sidelines of the meeting.
When questioned on the earlier confirmation by European Central Bank president Jean-Claude Trichet that a strong dollar is in the interests of the US, Reynders said: 'Yes of course, and the same is true for Europe'.
Similarly, Bos said the euro's current strength 'shows we have a sound economy and a sound currency,' though he noted that it will have some negative impact on exports.
Despite being tough on exporters, however, Capital Economics economist Julian Jessop said overall a stronger euro should be positive for the economy.
'It increases the competitive pressure on Europe to reform, so that countries are not able to rely on a weaker currency to support their exports,' he said. He also pointed to the positive impact for consumers through lower costs of imported goods, and for borrowers as a stronger currency would reduce the pressure on the central bank to raise interest rates.
Indeed, the need to make use of the good times in order to implement structural change and imrpove public finance was a clear message at the meeting.
Juncker stressed that euro zone countries should take full advantage of the current economic climate to improve their public finances and to aim for 'more ambitious budget targets than those set in 2006'.
German finance minister Peer Steinbrueck, who chairs the presidency, went further, calling for countries to achieve balanced budgets by 2010, a target he described as 'very realistic'.
He added that some member states may achieve this as early as 2008 and 2009.
Analysts said currency traders will be relieved at the apparent lack of concern on that euro's strength and may well take the confidence in the region's economy to push the currency higher.
'If anything the view on growth will support the euro,' Page said, though he said it will not give it a 'massive boost' given that it is already at such high levels.
If key euro zone data in the coming week, particularly the key German Ifo survey, come in on the strong side moreover, this could give it added momentum, he added.
There were some words of warning, however, with ECB president Jean-Claude Trichet reiterating that 'excessive volatility and disorderly movements are undesirable'.
Trichet also issued a veiled warning on the carry trade, saying that markets should be aware of 'two-way risks'.
The carry trade -- where investors borrow in low-yielding currencies in order to invest in higher-yielding assets elsewhere -- is seen as the main driver behind the recent weakness of the yen, which has hit several-year lows against several currencies and reached record lows against the euro.
'We believe the Japanese economy is on a sustainable path and that foreign exchange rates should reflect that,' Trichet said.
Among other prominent issues at the Ecofin meeting, ministers also discussed the issue of hedge fund regulation, broadly agreeing on the principle of self-regulation for the industry but stressing the need for greater transparency.
'(Regulation) will be an indirect approach, dependent on voluntary input from industry,' Germany's Steinbrueck told a news conference at the meeting of EU finance ministers.
It would be a 'success' to have an 'agreed code of conduct with the major players in the hedge fund industry,' he said, adding that the largest funds account for 80-90 pct of the volume of all such funds.
Elsewhere, the meeting failed to reach agreement on the possibility of implementing a reverse charge VAT system among EU member states in order to tackle VAT fraud.
Such fraud involves importing high-value goods from other EU countries free of VAT, selling them with the tax added but then failing to pass on the tax to the relevant countries' authorities. A 'reverse charge' system, where the purchaser as opposed to the seller must claim for a VAT refund, is seen as one way of tackling the problem.
Steinbrueck conceded, however, that there was 'no chance' of a deal on a reverse charge system as the proposal currently stands because 'a whole series of countries want various issues resolved'.
The matter will be discussed further at the next formal meeting of EU finance ministers next month. By Jessica Mortimer; jessica.mortimer@thomson.com jkm/fr/jkm COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.