U.S. system makes dollar strong, says greenspan

Associated Press

WASHINGTON — Federal Reserve chairman Alan Greenspan said Friday the dollar’s strength against the new European currency, the euro, stems from America’s better performance in boosting the productivity of the workforce.

While cautioning that it is always difficult to forecast directions in currency rates, Greenspan said it was evident that the dollar’s surprising strength against the euro owed a great deal to a more flexible U.S. workplace.

"Over the decades, Europe has sought to protect its workers from some of the presumed harsher aspects of free-market competition," Greenspan said in a speech to a Washington, D.C., business group. "To discourage layoffs, discharging employees was made more difficult and costly compared with doing so in the United States."

Greenspan said this difference in workplace flexibility was especially important in new fields such as the high-tech world, because start-up firms have a critical need to find innovative ways to cut costs.

If a country’s laws prohibit the easy hiring and firing of workers, that will limit the number of entrepreneurs willing to invest in new technologies, he said.

Greenspan said providing capital in new areas of technology offers investors greater chances to make large returns on their money. But restrictions in one country, such as tight labor market rules, will dampen the desire of foreigners in particular to make such investments.

Since the United States has fewer labor force restraints compared to Europe, investors view America as a superior place to make investments and earn bigger returns. Greenspan said this has been a key force boosting the value of the dollar compared to the euro.

The greater U.S. labor market flexibility has helped American companies be more productive, and this has attracted foreign capital even as America’s trade deficit has soared to record highs.

"The steady flow of capital from Europe to the United States in recent years is, presumably, the consequence of Europeans finding many investments in the United States persistently more attractive than those at home," Greenspan said.

Greenspan has been a major proponent of the view that the United States has entered a new era of greater productivity growth because of large investments made in information technology. He said in response to an audience question that he saw no evidence that U.S. productivity growth was faltering in the current quarter.

Greenspan made no comments about the overall economy or interest rates during his appearance. Many private forecasters are looking for the Federal Reserve to cut interest rates for an 11th time when the central bank next meets on Dec. 11 in a continued effort to restart an economy that slipped into a recession in March.

While there were predictions that the euro would overtake the U.S. dollar as the dominant international currency, this has not happened and Greenspan said it is unlikely to happen for some time to come.

"These expectations were probably overstated. History has shown us that once currencies achieve the status of an international vehicle currency, as the guilder and pound did in previous centuries, the established infrastructure of deep and liquid markets favors their continuing to be used."