PRAGUE — French President Nicolas Sarkozy's call for the European Central Bank to intervene to curtail the soaring euro is commonly seen as a sign that he neither understands nor trusts markets. Indeed, some now view Sarkozy as a traditional Gaullist who wants to help French producers by artificially devaluing the euro.
Still, could Sarkozy be right in believing that currency markets do not automatically drive exchange rates to levels consistent with the fundamentals of international trade?
After all, comparable goods often sell internationally at very different prices. For example, according to The Economist, a Big Mac hamburger sells in the euro zone for about three euros — roughly $4 at the current exchange rate — but for only about $3.20 in the United States, implying that the euro is overvalued by about 25 percent.
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