EU Girds for China Fight Over RMB

♠ Posted by Emmanuel in ,, at 10/09/2007 03:37:00 PM
I recently wrote about Eurozone finance ministers meeting in Brussels to decide what to do with global economic imbalances that have left the EU rocking and reeling. Like Twisted Sister, the EU ministers appear to have decided "We're Not Gonna Take It" and are contemplating a more active response to US dollar debasement and especially Chinese currency manipulation. We've seen this movie too in America over complaints about China's undervalued RMB. It's just too bad the EU needs to bear the double dose of dollar debasement in addition to Chinese manipulation. What's a customs union to do? The International Herald Tribune has this to offer on the proceedings of the Brussels meeting:

A meeting of the finance ministers from the 13 countries that use the euro issued a statement making a rare reference to China's exchange rate policy, a subject Europeans usually leave Washington to pursue with Beijing.

"China and other emerging-nation economies should introduce more flexibility in their exchange-rate management," the European Union monetary affairs commissioner, Joaquin Almunia, said after the declaration made late Monday in Luxembourg.

Jean-Claude Juncker, who chairs the group of 13 finance ministers, described the preoccupations of the meeting as being "first point China, second point dollar, third point yen."

The effort to put pressure on the Chinese government prompted a non-committal response from Beijing, which said it would stick to its policy of letting the yuan become more flexible over time.

Liu Jianchao, a Foreign Ministry spokesman, said, in response to a question about the "eurogroup" statement, that the yuan had risen by more than 9 percent against the dollar since Beijing revalued the currency by 2.1 percent in July 2005 and de-pegged it from the dollar to float within managed bands. [This is a blatant non-sequitur. Shouldn't the Chinese be talking about the value of the yuan against the Euro instead of against the dollar in this context? The yuan has lost 40% of its value against the common currency since 2000 according to the Economist.]

"China will continue making the relevant arrangements according to this flexible exchange rate policy," Liu said. "We are willing to engage in dialogue and consultation with concerned parties on this issue."

The European ministers' statement argued that in "emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur."

Buffeted by the impact of the U.S. subprime mortgage crisis and facing a projected economic slowdown as exporters deal with the effects of a high euro, concern is growing that Europe is paying the price for problems created elsewhere. The growing imbalance in trade with China is becoming an increasing issue for politicians in Europe.

Juncker, Almunia and the European Central Bank president, Jean-Claude Trichet, will visit Beijing before the end of the year.

European ministers showed less unity over how to deal with the depreciation of the dollar as they sought to coordinate positions ahead of a meeting of G7 finance ministers later this month.

At the Monday meeting in Luxembourg, French calls for central bank intervention to cut the costs borne by European exports failed to sway Germany's finance minister, Peer Steinbr├╝ck, who insisted publicly Monday that he loved "a strong euro."

But Pedro Solbes of Spain underlined concerns about recent volatility that are shared across much of Southern Europe.

After saying that exchange rates should reflect economic fundamentals, Solbes insisted that efforts to correct the euro-dollar relationship should "not only be made by the Europeans, but by all the parties concerned," according to news agencies.

That coded call for the United States to help avert further depreciation of the dollar - which fell to a record low against the euro last week - underlined the growing trans-Atlantic tensions over currency movements and concerns about the subprime mortgage crisis.

EU ministers are expected to agree Tuesday to proceed next year with a study that could lead to requirements for more disclosure of debt-default risks, as well as revisions on how assets are valued.

From the Financial Times:

Eurozone finance ministers on Monday night made clear they wanted a rise in the value of the Chinese renminbi, the dollar and the yen against the euro in order to ease pressures on the European economy from the euro’s appreciation on foreign exchange markets.

The three most senior eurozone policymakers – Jean-Claude Trichet, the European Central Bank president, Jean-Claude Juncker, chairman of the finance ministers’ group, and Joaquin Almunia, the European monetary affairs commissioner – will visit China before the end of this year to discuss exchange rates and other issues, Mr Juncker told reporters.

In a statement issued after a meeting in Luxembourg, the ministers broke new ground in listing the low exchange rate of China’s currency ahead of the weak dollar and the yen as a cause for European concern.

They said: “In emerging countries with large and growing current account surpluses, especially China, it is desirable that effective exchange rates move so that necessary adjustments occur.”

In what appeared a relatively mild appeal to the US not to let the dollar fall in a disorderly manner, they said: “We have noted with great attention that US authorities have reaffirmed that a strong dollar is in the interests of the US economy” [this is the most transparent falsehood of all, IMHO].

They said Japan’s economy was on a sustainable recovery path and market participants should take that into account in their assessment of risk.

Eurozone representatives intend to press their arguments on exchange rates harder at a Group of Seven meeting in Washington on October 20-22 to be attended by finance ministers and central bankers of the world’s leading industrialised countries.

On a related note, the FT also features French Finance Minister Christine Lagarde saying that newfangled financial derivatives need to "lose the excesses of youth" by becoming more standardized. Like her, other EU ministers are calling for tighter regulation of credit rating agencies--especially the separation of rating and consultancy functions. It's good that the ol' EU is at least trying to curb the worst abuses of casino capitalism when the US couldn't care less at this point in time.