Euro in a Messed Up World Economy

♠ Posted by Emmanuel in ,, at 11/14/2007 12:59:00 AM
After having their big guns engage in a joint EU-US China bashing exercise, EU finance ministers are once again pressing their case before an EU delegation visits Beijing in a fortnight. I actually feel for the EU: the euro is the only major "escape valve" for the currency shenanigans of other players in the global economy. The US keeps reiterating a (non-existent) strong dollar policy. Even if euro/yen is still quite overpriced, Japanese PM Fukuda is already warning about yen strength as the carry trade winds down, suggesting possible Bank of Japan intervention. Meanwhile, China is still socking away billions of dollars each month in reserves to moderate the pace of yuan revaluation. Hence, the Eurozone has borne the brunt of others' actions. Especially worrying for these ministers is the fast rising bilateral trade deficit the EU is running with China. Here is Bloomberg with the story:
European finance ministers pressed China to let its currency strengthen so their economy no longer bears the brunt of the drop in the U.S. dollar.

With the dollar plumbing record lows against the euro this month, the officials meeting in Brussels complained Europe's economy is shouldering more than its share of the impact. The ministers are stepping up complaints two weeks before a European delegation goes to Beijing to make the case for a stronger yuan.

The visit to China is ``an important element of a dialogue with a very important player in the world economy,'' German Deputy Finance Minister Thomas Mirow told reporters in Brussels today. Still, ``expectations shouldn't be too high'' that European demands will be accepted overnight, Mirow said.

The European delegation will be led by Luxembourg Finance Minister Jean-Claude Juncker, EU Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet. The topic is also high on the agenda of this week's meeting of the Group of 20 near Cape Town.

While China's currency has gained 5.1 percent against the dollar this year, it has dropped 4.7 percent against the euro, hurting Europe's exporters.

``We'll try to make clear to our Chinese friends and counterparts that China has a growing responsibility as far as international monetary policy is concerned,'' Juncker said. He added it will take more than one trip for the ``whole world to change.''

``China has accelerated the yuan's gain in the past few weeks and will appreciate the yuan at its own pace,'' said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. ``International pressures won't have much impact on China's currency rate.''

The dollar's slump is making international policy makers worried it will hurt their exports at a time when U.S. demand for them is already slowing. Japanese Prime Minister Yasuo Fukuda told today's Financial Times that the yen is appreciating ``too fast'' after its 7.5 percent jump in three months.

Canada will tell the G-20 it's bearing a disproportionate share of the drop in the U.S. dollar, an official told reporters in Ottawa today on condition of anonymity. Canada and Europe are each absorbing about a third of the decline, crimping growth in their economies, and Canada has a much smaller population to shoulder it, the official said.

In Brussels, Juncker told reporters yesterday that ``Recent sharp moves in exchange rates are unwelcome.''

Other than repeating that a ``strong'' dollar is in the U.S. interest and defending its status as the world's principal currency, U.S. Treasury Secretary Henry Paulson has not sought to reverse the dollar's drop. Paulson said Nov. 8 that China is ``out of step'' with the rest of the world's call to let the yuan appreciate faster.

The U.S. hasn't intervened to buy dollars since August 1995, while Japan hasn't acted in markets since March 2004. The Group of Seven nations last intervened together in September 2000, to buoy the euro.

China's trade surplus rose to a record $27.05 billion in October, an increase of 13.5 percent from a year earlier, the country's customs bureau said yesterday. The euro-area trade gap with China widened 25 percent to a record 59.9 billion euros ($87.1 billion) in the seven months through July, according to data released Oct. 18 by the European Union's statistics office.

``It remains an arduous task to balance international payments,'' Hu Xiaolian, head of China's State Administration of Foreign Exchange, said in a statement yesterday. She reiterated a pledge to improve the yuan's exchange-rate mechanism and to make the currency convertible.

Dutch Finance Minister Wouter Bos in an interview described the European trip to China as a ``very important move, a very important symbol showing that the Chinese are slowly becoming a partner that is seriously playing its part on the world stage.

This ``also puts some obligations on them and that I guess is what the discussion is going to be about,'' Bos said.

Trichet said Nov. 8 that it is ``essential'' that China step up to its ``global responsibilities'' after the ECB chief complained that recent currency-rate shifts have been ``brutal.''

Businesses are making similar complaints, with Ernest-Antoine Seilliere, president of BusinessEurope, the European employers' federation, telling the ministers in a speech that an undervalued yuan is ``damaging for the global economy and in particular for Europe...''

Almunia and Juncker both predicted the turbulence in financial markets that began in August will continue to pose a threat to Europe's expansion, although how much remained in doubt.

``The financial-market turmoil is not over,'' Almunia said. ``The longer the trend, the higher the risks are that the economy will be affected negatively.''