STRASBOURG, France (Thomson Financial) - Portuguese Finance Minister Fernando Teixeira dos Santos, whose country holds the EU presidency, said the current level of the euro is not a problem for the euro zone economy.
"I don't think and don't believe that we have a problem in exchange rates at the moment," Teixeira dos Santos told the European Parliament economic and monetary affairs committee.
The euro hit a new record high of 1.3791 usd this morning.
He said the euro's trend is not out of line with past developments in real terms.
He added that countries should not think of resolving their economic problems by looking to devalue the exchange rate.
Instead they should focus on improving the competitiveness of their economies through structural reforms, he said.
"The solution lies in structural reforms. If we want to gain competitiveness, it's not by devaluing our currencies (that we will do this)... it is by looking at the other side of the real exchange rate, which is productivity, and it is there that we have got to focus our attention," he said.
He said European politicians "will be falling asleep" if they fall into the temptation of trying to bring down the euro's nominal exchange rate.
Teixeira dos Santos also said European governments need to take advantage of the current period of strong economic growth to make a significant improvement in their fiscal positions.
He said it is not enough to keep deficits below the 3 pct of GDP limit set by the EU stability and growth pact.
Governments have to continue reducing deficits in the short and medium term to ensure that there is a sufficient safety margin in their public finances to keep deficits under control when growth deteriorates, he said.
The Portuguese EU presidency will look at ways of improving the stability pact's "preventive arm", which sets rules for fiscal policy at times of strong growth, he said.
French President Nicolas Sarkozy is not trying to undermine the pact, despite his plans for a pause in France's deficit reduction, Teixeira dos Santos said.
Sarkozy told euro zone finance ministers on Monday his vast programme of economic reforms will have some immediate costs in budget terms, but that he would still respect the stability pact rules and any eventual additional revenues from the reforms will go to deficit reduction, Teixeira dos Santos said.
"No country is challenging the pact," he said.
Sarkozy has said the pause in France's deficit reduction is likely to mean that it will only reach a balanced budget position by 2012, rather than the 2010 deadline previously agreed by finance ministers.
Teixeira dos Santos said public finances have to remain within the pact's rules.
"The competitiveness of the European economy requires... stability in public finances," he said. "The stability and growth pact is a pillar of this stability."
He told reporters that Portugal itself is still aiming to reduce its fiscal deficit to 3.3 pct of GDP this year.
But he added: "If there is a possibility to do better than that, then we will do it."
He said deficit reduction in the euro zone and the European Central Bank's conduct of monetary policy have both contributed to the euro zone's strong growth performance.
"This particular combination has provided Europe with a good economic moment," he said.
"I respect the independence of the ECB. I think we are having good results on the basis of that independence," he said.
He said the European economy has continued to grow at a sustained rate recently but it is necessary to strengthen the dynamism of the economy to create the conditions for sustainable long-term growth.
Teixeira dos Santos defended the decision by EU finance ministers to nominate former French finance minister Dominique Strauss Kahn for the post of International Monetary Fund managing director on Tuesday.
The UK in particular wanted a longer debate on the nomination and the European Parliament was looking to audition potential candidates.
But Teixeira dos Santos said the EU had to move quickly to be sure that it did not lose the opportunity to put forward its candidate.
steve.whitehouse@thomson.com
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