March 24 (Bloomberg) -- Chinese executives are joining U.S. President Barack Obama in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.
Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said appreciation would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.
While the comments conflict with Wen, who said March 14 that criticizing the exchange-rate policy amounted to “protectionism,” they are in line with traders who expect the government will let the yuan appreciate later this year. U.S. lawmakers have called on Obama to use the threat of trade sanctions to force an end to a currency regime that they blame for making their nation’s manufacturers uncompetitive.
“We need to emphasize the benefits of yuan gains,” Zhang Yanling, vice chairman of Beijing-based Bank of China Ltd., the nation’s biggest foreign-currency lender, said in a March 19 interview. “The U.S. should also be talking about both aspects of the issue. We shouldn’t politicize it or become emotional.”
Contracts linked to its future value predict the currency will break its dollar link by July, gaining beyond 6.8 in three months. Twelve-month offshore forwards, which weakened to a three-month low yesterday, climbed 0.2 percent to 6.6687 per dollar today. They reflect bets the yuan will advance 2.4 percent in the coming year, down from 3 percent before Wen’s briefing.
Quick Gain ‘Disruptive’
Hangzhou-based Wanxiang Group Co., the nation’s largest auto-parts maker, can cope with a gradual advance, though a quick appreciation would be “disruptive,” Chairman Lu Guanqiu said in a March 8 interview in Beijing.
China Eastern Airlines Corp., the nation’s second-largest carrier, would increase profit by 280 million yuan ($41 million) for every 1 percent annual yuan gain because of its dollar debt, President Ma Xulun said at a shareholders’ meeting March 19. The Shanghai-based company may post 2009 net income of 614 million yuan, according to the median of seven analyst estimates compiled by Bloomberg.
Airlines Rally
The airline’s shares climbed 17 percent in the past month in Hong Kong, as the MSCI China Index rose 4 percent to 62.80.
Morgan Stanley recommended on March 18 buying China Eastern along with Shanghai-based Baoshan Iron & Steel Co., the biggest publicly traded Chinese steelmaker. The New York-based bank estimated that the 5 percent maximum appreciation in the yuan it predicts for 2010 will have an average 2 percent positive impact on the earnings of Chinese companies, making them more attractive.
“Yuan appreciation will bring us benefits because we import several billion yuan worth of ore every year from abroad,” Chen, chairman of Hunan Lengshuijiang Steel, based in central Hunan province, said in a March 12 interview in Beijing.
Chinese banking executives blame the yuan peg for disrupting money markets. China’s dollar purchases to maintain the peg have driven currency reserves to $2.4 trillion and flooded the financial system with yuan. Chinese investors held $889 billion of Treasuries on Jan. 31, the biggest overseas holder of such debt.
Market-Driven Rates
China’s benchmark deposit rate is 2.25 percent, less than the 2.7 percent rate of consumer-price inflation in February. The central bank can’t raise interest rates without attracting more speculative capital at a time when U.S. benchmark rates are near zero.
“If we don’t reform the exchange-rate regime, how can we price interest rates based on the market?” Qin, 62, at Shenzhen-based China Merchants, the nation’s fifth-largest lender by market value, told reporters on March 3 in Beijing.
Lenovo’s Yang, 45, said limited appreciation in the yuan wouldn’t be a “bad thing” as it would boost Chinese domestic purchasing power and encourage global trade using the currency. Lenovo acquired International Business Machines Corp.’s personal computer business in 2005.
“We may not worry too much about exporters if we can conduct more yuan-denominated trade,” Yang told reporters on March 5 in Beijing. China allowed yuan settlement in some parts of the country starting July 2 last year.
Expectations that China’s currency will appreciate drove such settlements to 7 billion yuan in the first two months of this year, almost twice the 3.6 billion yuan in the second half of 2009, according to Zhang, 58, at Bank of China, which has more than 800 overseas branches that can handle the trades.
“If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar,” she said. “Will this be good for the U.S.?”
Stress Tests
Textile and furniture makers stand to lose the most from appreciation as their profit margins are as low as 3 percent, said Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, at a March 18 press briefing in Beijing. Some would “face bankruptcy,” he said, after his organization conducted stress tests at 1,000 companies.
Sean Callow, a strategist in Sydney at Westpac Banking Corp., said in a March 23 interview that investors should buy six-month contracts because the trade dispute may cause “a relatively short” delay to the currency appreciation needed to fight inflation.
Economic Rebalancing
Wen, 67, has kept the yuan at about 6.8 per dollar since July 2008 to protect China’s exporters during the global recession, after allowing a 21 percent advance in the previous three years.
China may report a trade deficit of more than $8 billion in March, compared with a $24 billion surplus in October, as imports grow faster than exports, Wen told the China Development Forum on March 22. Exports accounted for a quarter of gross domestic product last year, down from a third in 2008, government data show.
Obama, 48, said on March 11 in Washington that “a more market-orientated exchange rate will make an essential contribution” to re-balancing the global economy. Five senators proposed legislation last week that would allow the U.S. to take action against exchange-rate “misalignments.” The Treasury Department will decide next month whether to label China as manipulating its currency, a designation not invoked since 1994.
Sending a Message
“To the extent that rhetoric increases in the U.S. you play to the hardliners in China, which makes it that much more difficult for the government to move,” Susan Schwab, a former U.S. Trade representative, said in a March 18 interview in Hong Kong. “We always have this impression that China is monolithic. There are debates going on internally.”
A planned meeting of Chinese and U.S. officials in Beijing in May will help “address disputes,” Premier Wen said at this week’s forum, calling on the world’s executives to help avoid a “currency war.” People’s Bank of China Governor Zhou Xiaochuan appealed for less “noise” in the debate, saying in Cancun, Mexico the same day that policy decisions should be based on “sound economic analysis.”
“On the political front, the administration has to play to the hard line and say we are not going to be swayed by U.S. pressure,” said Lee Boon Keng, Singapore-based deputy chief investment officer at Bank Julius Baer & Co., which manages about $142 billion in assets. It’s significant that executives at state enterprises are speaking in support of appreciation, he added, because “they’re sending a very strong message to the markets, to the people, that look, it actually works for you.”
Tuesday, March 23, 2010
Thursday, March 18, 2010
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Arcane Currency Battle Masks Deeper Economic Tensions with China
For much of the last decade, the economic relationship between the United States and China was like a bartender and his favorite patron. American consumers knocked back flat-panel TVs, laptops and lots of other made-in-China products while Beijing rang up the charges, but extended more and more credit so the customer could keep drinking.
On paper, the Chinese accumulated hundreds of billions of U.S. dollars. But instead of cashing in its horde, China loaned much of it back to Americans to help finance ever-higher consumer borrowing, as well as federal deficits and cheap mortgages.
It was a mutually beneficial arrangement while it lasted. But the Great Recession put that mountain of debt in a new, unsettling light. Now, the two partners are eyeing each other with growing resentment – each showering the other with unwelcome demands for policy changes.
And the tensions are being aggravated by domestic politics in both countries.
"The proverbial train wreck may be coming to pass," said Nicholas Lardy, a prominent China expert at the Peterson Institute for International Economics in Washington.
Chinese officials have begun to warn that, if Washington doesn't curb its rising deficits and stop badgering China to make concessions on currency and export policies, Beijing may begin dumping dollars. Or it might at least cut back on the massive buying of Treasury bonds that Washington depends on to finance its deficit.
Any such action could inflict economic pain on millions of Americans, costing jobs and hurting the recovery, some economists say.
But China is over a barrel too. If Beijing tightened the screws, the dollar would decline. The value of China's holdings would shrink. So would Americans' consumption of Chinese products. Even with the recession, U.S. imports from China amounted to a whopping $296 billion last year, while exports to China were just $70 billion, according to U.S. data.
Beijing has no ready replacement for the United States as its biggest customer. And years of rapid growth and rising prosperity have created popular expectations in China that the ruling Communist hierarchy cannot easily ignore -- especially the opinions of its the increasingly vocal business community and middle class.
The basic issue is how to reshape the U.S.-China relationship on a more sustainable and balanced basis. And the process is almost certain to require uncomfortable changes on both sides.
But right now the historic drama is playing out in an arcane argument over currency exchange rates – the value of the yuan versus the dollar
Scores of U.S. lawmakers in recent days have demanded that China strengthen its currency, so its goods wouldn't be so cheap in U.S. and other foreign markets. Raising the value of the yuan could also encourage China to buy more American products.
"The silence of our government on China's currency manipulation has become the silence of our factories," said Sen. Olympia Snowe, (R-Maine), a senior member of the Finance Committee.
Outside Congress, leading free-trade proponents including Nobel laureate Paul Krugman have joined labor leaders such as Leo Gerard of the Steelworkers Union in denouncing Beijing's refusal to act.
Twice in the last two months, Obama has called on the Chinese to act on their currency. Each time, the president got a sharp, negative response.
"For the Chinese government, it's not only about losing face and confidence" if they bow to U.S. pressure, said Zhou Shijian, a senior research fellow at the Center for U.S.-China relations at Tsinghua University. "It's also about the economy."
"In 2009, exports dropped 16%. Appreciating the yuan will impact the economy and social stability, not just face," he said.
Outside of China, few dispute that the yuan is undervalued, and most say by 25% or more. But there are differences over how much even a big increase in its value would help employment in the U.S. – or hurt it in China.
Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore, calculates that he could double his company's payroll, to 60, if the Chinese currency rose by 25% or more against the dollar. That would more than offset the 10% to 15% cost disadvantage that Marlin's wire baskets currently have against made-in-China competitors.
On paper, the Chinese accumulated hundreds of billions of U.S. dollars. But instead of cashing in its horde, China loaned much of it back to Americans to help finance ever-higher consumer borrowing, as well as federal deficits and cheap mortgages.
It was a mutually beneficial arrangement while it lasted. But the Great Recession put that mountain of debt in a new, unsettling light. Now, the two partners are eyeing each other with growing resentment – each showering the other with unwelcome demands for policy changes.
And the tensions are being aggravated by domestic politics in both countries.
"The proverbial train wreck may be coming to pass," said Nicholas Lardy, a prominent China expert at the Peterson Institute for International Economics in Washington.
Chinese officials have begun to warn that, if Washington doesn't curb its rising deficits and stop badgering China to make concessions on currency and export policies, Beijing may begin dumping dollars. Or it might at least cut back on the massive buying of Treasury bonds that Washington depends on to finance its deficit.
Any such action could inflict economic pain on millions of Americans, costing jobs and hurting the recovery, some economists say.
But China is over a barrel too. If Beijing tightened the screws, the dollar would decline. The value of China's holdings would shrink. So would Americans' consumption of Chinese products. Even with the recession, U.S. imports from China amounted to a whopping $296 billion last year, while exports to China were just $70 billion, according to U.S. data.
Beijing has no ready replacement for the United States as its biggest customer. And years of rapid growth and rising prosperity have created popular expectations in China that the ruling Communist hierarchy cannot easily ignore -- especially the opinions of its the increasingly vocal business community and middle class.
The basic issue is how to reshape the U.S.-China relationship on a more sustainable and balanced basis. And the process is almost certain to require uncomfortable changes on both sides.
But right now the historic drama is playing out in an arcane argument over currency exchange rates – the value of the yuan versus the dollar
Scores of U.S. lawmakers in recent days have demanded that China strengthen its currency, so its goods wouldn't be so cheap in U.S. and other foreign markets. Raising the value of the yuan could also encourage China to buy more American products.
"The silence of our government on China's currency manipulation has become the silence of our factories," said Sen. Olympia Snowe, (R-Maine), a senior member of the Finance Committee.
Outside Congress, leading free-trade proponents including Nobel laureate Paul Krugman have joined labor leaders such as Leo Gerard of the Steelworkers Union in denouncing Beijing's refusal to act.
Twice in the last two months, Obama has called on the Chinese to act on their currency. Each time, the president got a sharp, negative response.
"For the Chinese government, it's not only about losing face and confidence" if they bow to U.S. pressure, said Zhou Shijian, a senior research fellow at the Center for U.S.-China relations at Tsinghua University. "It's also about the economy."
"In 2009, exports dropped 16%. Appreciating the yuan will impact the economy and social stability, not just face," he said.
Outside of China, few dispute that the yuan is undervalued, and most say by 25% or more. But there are differences over how much even a big increase in its value would help employment in the U.S. – or hurt it in China.
Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore, calculates that he could double his company's payroll, to 60, if the Chinese currency rose by 25% or more against the dollar. That would more than offset the 10% to 15% cost disadvantage that Marlin's wire baskets currently have against made-in-China competitors.
Sunday, March 7, 2010
China faces new pressure to let currency rise
BEIJING — China faces mounting pressure from trading partners to loosen currency controls and is giving signs it might raise the value of the yuan to ease strains on its fast-growing economy.
A stronger yuan could help China's leaders achieve their goal of making the economy more self-sustaining by boosting consumer buying power and reducing dependence on exports and investment. It could narrow China's politically volatile trade surplus, making the flood of foreign money pouring into the economy more manageable.
A change might also help defuse tensions with the United States, Europe and other trading partners that complain an undervalued yuan makes China's exports unfairly cheap and hurts foreign competitors, possibly prolonging the global economic crisis. Some American lawmakers are calling for punitive tariffs on Chinese goods if Beijing fails to act.
Analysts say Beijing might allow the yuan to rise against the dollar before the middle of this year. But they say any increase will be gradual and do little to narrow U.S. and European trade deficits and create jobs.
"Even if China starts to appreciate, the possibility is it will be very slow and gradual, without an immediate impact on trade," said Nicholas Consonery, an analyst in Washington for Eurasia Group, a consulting firm.
On Friday, Premier Wen Jiabao said in a speech to China's legislature that the yuan will be kept "basically stable" at an "appropriate and balanced" level this year, though he gave no explanation of what that would mean.
Beijing tied the yuan to the dollar for decades but broke that link in 2005 and allowed it to rise by about 20 percent through late 2008. The government slammed on the brakes after the crisis hit and has held its currency steady against the greenback to help exporters compete as a plunge in global demand wiped out millions of Chinese factory jobs.
The United States and Europe downplayed currency complaints as they worked together with Beijing to revive global growth. But facing pressure to create jobs, they and governments as far-flung as Brazil have renewed demands for China to act.
President Barack Obama vowed in early February to "get much tougher" in trade disputes with China and to press for an end to currency regimes that he said depress export prices and put U.S. companies at a disadvantage. The U.S. Treasury has the option of declaring Beijing a currency manipulator in a report due out in April, which could set the stage for a complaint to the World Trade Organization and possible sanctions on Chinese goods.
Last year's U.S. trade deficit with China was $227 billion, down 15 percent from 2008 but among the highest ever. The 27-nation European Union reported a 65 billion euro ($88 billion) deficit with China for the first half of 2009.
A bipartisan group of 15 American senators urged U.S. Commerce Secretary Gary Locke in a Feb. 25 letter to investigate whether Beijing improperly helps Chinese companies by holding down the yuan. They said it is undervalued by up to 40 percent.
A stronger yuan would help Beijing get back on track to boosting household spending power after its 4 trillion yuan ($586 billion) stimulus package helped China to rebound quickly from the global crisis but worsened the tilt toward relying on investment to create jobs.
Chinese leaders worry that reckless overspending on unneeded factories and other assets could lead to financial problems, while the country can no longer count on double-digit annual export gains to drive growth.
But they face a daunting potential pitfall: A stronger yuan might hurt exports and cost jobs, fueling social tensions, while spending by China's consumers might not rise fast enough to fill the gap.
"They are in a difficult balancing act," said Michael Pettis, an associate professor of finance at Peking University's Guanghua School of Management. "The steps that need to be taken to rebalance the economy worsen the unemployment problem, and the steps that are taken to resolve unemployment worsen the imbalance."
Analysts say a rise in the yuan could begin before the middle of this year if export growth, which revived in December, stays on track.
That might coincide with the June meeting of the U.S.-China Strategic and Economic Dialogue, where the Americans are expected to make currency a priority. It would let Beijing's envoys respond to U.S. complaints by saying it was already taking action.
In a signal Beijing might be about to act, President Hu Jintao used the term "speed up" 50 times in a Feb. 3 speech to refer to building a consumption-based economy.
"There is an urgency about this. They realize this investment- and export-based economy needs to be balanced," said Citigroup economist Ken Peng.
But currency policy changes aren't expected during the two-week annual meeting of China's ceremonial legislature that ends in mid-March — a high-profile event when communist leaders try to prevent any shocks to business.
Analysts say a likely scenario is a small one-time rise in the yuan's value against the dollar, followed by a gradual, long-term increase to allow exporters of shoes, toys and other low-profit goods to adapt to tougher conditions.
China took a similar approach in 2005, when it revalued the yuan by 2 percent in a single day, then allowed a gradual, tightly controlled upward crawl that saw it gain about 5 percent annually.
"It's impossible for them to revalue in a sharp one-off move," Peng said. "If you do a one-time adjustment of 5 percent, that will put a lot of businesses into the red instantly, so that's not something they are willing to do."
In a possible effort to prepare the public for a change, government researchers have been quoted in the state press discussing possible approaches to a revaluation. A commentary in the China Securities Journal newspaper by Zhang Ming, a finance specialist at the Chinese Academy of Social Sciences, said the yuan might be allowed to rise by 5 percent this year.
Yet even if Chinese goods get more expensive in dollar terms, that won't drive American job growth because U.S. factories no longer make what China supplies, said UBS economist Dong Tao in a report this month. He said business would shift instead to Malaysia, Mexico or other low-cost suppliers.
"Unless the U.S. rebuilds its manufacturing base, China's loss would not be the U.S.'s gain," Tao wrote.
And the array of tensions with Washington over Taiwan, Tibet and the Internet could complicate Beijing's timing by making some leaders reluctant to look like they were giving in to pressure, said Citigroup's Peng.
"It will be very difficult for Chinese authorities to justify why they are allowing the currency to appreciate now," Peng said. "Appreciation is still viewed as some sort of a concession."
A stronger yuan could help China's leaders achieve their goal of making the economy more self-sustaining by boosting consumer buying power and reducing dependence on exports and investment. It could narrow China's politically volatile trade surplus, making the flood of foreign money pouring into the economy more manageable.
A change might also help defuse tensions with the United States, Europe and other trading partners that complain an undervalued yuan makes China's exports unfairly cheap and hurts foreign competitors, possibly prolonging the global economic crisis. Some American lawmakers are calling for punitive tariffs on Chinese goods if Beijing fails to act.
Analysts say Beijing might allow the yuan to rise against the dollar before the middle of this year. But they say any increase will be gradual and do little to narrow U.S. and European trade deficits and create jobs.
"Even if China starts to appreciate, the possibility is it will be very slow and gradual, without an immediate impact on trade," said Nicholas Consonery, an analyst in Washington for Eurasia Group, a consulting firm.
On Friday, Premier Wen Jiabao said in a speech to China's legislature that the yuan will be kept "basically stable" at an "appropriate and balanced" level this year, though he gave no explanation of what that would mean.
Beijing tied the yuan to the dollar for decades but broke that link in 2005 and allowed it to rise by about 20 percent through late 2008. The government slammed on the brakes after the crisis hit and has held its currency steady against the greenback to help exporters compete as a plunge in global demand wiped out millions of Chinese factory jobs.
The United States and Europe downplayed currency complaints as they worked together with Beijing to revive global growth. But facing pressure to create jobs, they and governments as far-flung as Brazil have renewed demands for China to act.
President Barack Obama vowed in early February to "get much tougher" in trade disputes with China and to press for an end to currency regimes that he said depress export prices and put U.S. companies at a disadvantage. The U.S. Treasury has the option of declaring Beijing a currency manipulator in a report due out in April, which could set the stage for a complaint to the World Trade Organization and possible sanctions on Chinese goods.
Last year's U.S. trade deficit with China was $227 billion, down 15 percent from 2008 but among the highest ever. The 27-nation European Union reported a 65 billion euro ($88 billion) deficit with China for the first half of 2009.
A bipartisan group of 15 American senators urged U.S. Commerce Secretary Gary Locke in a Feb. 25 letter to investigate whether Beijing improperly helps Chinese companies by holding down the yuan. They said it is undervalued by up to 40 percent.
A stronger yuan would help Beijing get back on track to boosting household spending power after its 4 trillion yuan ($586 billion) stimulus package helped China to rebound quickly from the global crisis but worsened the tilt toward relying on investment to create jobs.
Chinese leaders worry that reckless overspending on unneeded factories and other assets could lead to financial problems, while the country can no longer count on double-digit annual export gains to drive growth.
But they face a daunting potential pitfall: A stronger yuan might hurt exports and cost jobs, fueling social tensions, while spending by China's consumers might not rise fast enough to fill the gap.
"They are in a difficult balancing act," said Michael Pettis, an associate professor of finance at Peking University's Guanghua School of Management. "The steps that need to be taken to rebalance the economy worsen the unemployment problem, and the steps that are taken to resolve unemployment worsen the imbalance."
Analysts say a rise in the yuan could begin before the middle of this year if export growth, which revived in December, stays on track.
That might coincide with the June meeting of the U.S.-China Strategic and Economic Dialogue, where the Americans are expected to make currency a priority. It would let Beijing's envoys respond to U.S. complaints by saying it was already taking action.
In a signal Beijing might be about to act, President Hu Jintao used the term "speed up" 50 times in a Feb. 3 speech to refer to building a consumption-based economy.
"There is an urgency about this. They realize this investment- and export-based economy needs to be balanced," said Citigroup economist Ken Peng.
But currency policy changes aren't expected during the two-week annual meeting of China's ceremonial legislature that ends in mid-March — a high-profile event when communist leaders try to prevent any shocks to business.
Analysts say a likely scenario is a small one-time rise in the yuan's value against the dollar, followed by a gradual, long-term increase to allow exporters of shoes, toys and other low-profit goods to adapt to tougher conditions.
China took a similar approach in 2005, when it revalued the yuan by 2 percent in a single day, then allowed a gradual, tightly controlled upward crawl that saw it gain about 5 percent annually.
"It's impossible for them to revalue in a sharp one-off move," Peng said. "If you do a one-time adjustment of 5 percent, that will put a lot of businesses into the red instantly, so that's not something they are willing to do."
In a possible effort to prepare the public for a change, government researchers have been quoted in the state press discussing possible approaches to a revaluation. A commentary in the China Securities Journal newspaper by Zhang Ming, a finance specialist at the Chinese Academy of Social Sciences, said the yuan might be allowed to rise by 5 percent this year.
Yet even if Chinese goods get more expensive in dollar terms, that won't drive American job growth because U.S. factories no longer make what China supplies, said UBS economist Dong Tao in a report this month. He said business would shift instead to Malaysia, Mexico or other low-cost suppliers.
"Unless the U.S. rebuilds its manufacturing base, China's loss would not be the U.S.'s gain," Tao wrote.
And the array of tensions with Washington over Taiwan, Tibet and the Internet could complicate Beijing's timing by making some leaders reluctant to look like they were giving in to pressure, said Citigroup's Peng.
"It will be very difficult for Chinese authorities to justify why they are allowing the currency to appreciate now," Peng said. "Appreciation is still viewed as some sort of a concession."
Thursday, March 4, 2010
The Global Roots of Euro-Jitters
FLORENCE – It is too simplistic to explain the current wave of concern about the euro in terms of Greece’s problems. Greece has massive fiscal and competitiveness problems, but Greece (2.25% of the population of the European Union) is smaller than California (12% of the population of the United States). And California, too, is suffering massive fiscal difficulties and declining competitiveness in some of the industries in which Californians were once pioneers.
The euro’s current problems are, instead, a reflection of unresolved Europe-wide and global problems. The common currency is the canary in the mine of the global exchange-rate system.
The euro precisely measures international tensions in that it is a bold experiment: a currency that is not linked to a state, but rather follows from international rules and treaties. It is a creature of the intellect rather than a product of power. It is a post-modern or post-sovereign currency. But in the aftermath of a crisis, countries put national interests above their willingness to go along with international rules.
The creation of money is often thought to be the domain of the state: this was the prevalent doctrine of the nineteenth century, reaching its apogee in the German economist Georg Friedrich Knapp’s The State Theory of Money. In the New Testament, Christ famously answers a question about obedience to civil authorities by examining a coin and telling the Pharisees, “Render unto Caesar what is Caesar’s.” Unlike most banknotes and coins, there is no picture of the state or its symbols – no Caesar – on the money managed by the European Central Bank.
There has always been a close relationship between European monetary integration and global problems. Europeans thought that their close geographic proximity and shared cultural inheritance might enable them to produce answers where global debates had become stalled. When things did not work out globally, a regional solution might be possible.
The impetus to the first act of European monetary integration, the 1970 Werner Report, stemmed from awareness that there were major difficulties in the fixed exchange-rate system established in 1944 at the Bretton Woods conference. Nobody outside the US could force it to restrain either its monetary policy, which was becoming increasingly expansive under President Richard Nixon, or its fiscal policy, marked by mushrooming deficits due to the costs of the Vietnam war.
Policymakers in France loved to quote a remark by the French poet Paul Valéry, who in the middle of the chaos of the Great Depression had written that “Europe visibly aspires to be governed by an American committee.” To Europeans, the International Monetary Fund, which supervised exchange-rate arrangements in the post-Bretton Woods world, looked like a perfectly American committee, and France did not like that.
The Werner Report’s ideas were too feeble to deal with the currency turmoil of the early 1970’s, and it was almost a decade before Europe produced a new response. The European Monetary System began as a high-level reaction to global currency chaos, and in particular to the depreciation of the dollar in 1977 and 1978, which seemed to threaten its continued role as the major international reserve currency.
The process that began with the report of the Delors Committee in 1989 and led to the Maastricht Treaty in 1992, the establishment of the euro in 1999, and the introduction of the physical currency in 2002 was rooted in an attempt to devise mechanisms that would generate a more stable global exchange-rate regime.
The critical policy innovators of the late 1980’s, in particular the highly activist French Finance Minister Edouard Balladur, took an international answer and started to advocate its realization on the European level. At the G-7 meeting of finance ministers in Louvre in February 1987, Balladur suggested a system of currency target zones; when its realization proved problematic, he pushed on with a more definitive and tighter European version of the scheme.
What resulted was a partly flawed answer to the problem. That was because France and Germany, the principal protagonists in the drama of monetary integration, had different visions of how the problem should be solved. The Germans pressed for clearly defined fiscal rules, but other countries wanted more wiggle room. The French argued for European economic governance alongside the monetary union, but that looked to others as imposing too much French planisme. A watered-down version of the German solution was eventually adopted.
Today, as in the 1960’s or 1970’s, we face a fundamentally global problem of inconsistent monetary policies. Back then, Europeans complained that low interest rates in America were driving global inflation; now low US interest rates are blamed for driving irresponsible asset-price booms.
Indeed, low US interest rates, though an appropriate domestic response to the financial crisis, have pushed a global carry trade in which people borrow in dollars to fund investments in the apparently less crisis-hit large emerging-market economies. These large transactions are funneled through the international banking system.
The answers to a global problem of this kind cannot be found on a European level. It will demand global coordination of monetary policies, and some form of global economic governance. Europe tried this combination, and found that even in a regional setting it could not be fully realized. Instead, an imperfect answer produced heightened vulnerability. The result is that Europe has made itself into the primary victim of the financial crisis.
The euro’s current problems are, instead, a reflection of unresolved Europe-wide and global problems. The common currency is the canary in the mine of the global exchange-rate system.
The euro precisely measures international tensions in that it is a bold experiment: a currency that is not linked to a state, but rather follows from international rules and treaties. It is a creature of the intellect rather than a product of power. It is a post-modern or post-sovereign currency. But in the aftermath of a crisis, countries put national interests above their willingness to go along with international rules.
The creation of money is often thought to be the domain of the state: this was the prevalent doctrine of the nineteenth century, reaching its apogee in the German economist Georg Friedrich Knapp’s The State Theory of Money. In the New Testament, Christ famously answers a question about obedience to civil authorities by examining a coin and telling the Pharisees, “Render unto Caesar what is Caesar’s.” Unlike most banknotes and coins, there is no picture of the state or its symbols – no Caesar – on the money managed by the European Central Bank.
There has always been a close relationship between European monetary integration and global problems. Europeans thought that their close geographic proximity and shared cultural inheritance might enable them to produce answers where global debates had become stalled. When things did not work out globally, a regional solution might be possible.
The impetus to the first act of European monetary integration, the 1970 Werner Report, stemmed from awareness that there were major difficulties in the fixed exchange-rate system established in 1944 at the Bretton Woods conference. Nobody outside the US could force it to restrain either its monetary policy, which was becoming increasingly expansive under President Richard Nixon, or its fiscal policy, marked by mushrooming deficits due to the costs of the Vietnam war.
Policymakers in France loved to quote a remark by the French poet Paul Valéry, who in the middle of the chaos of the Great Depression had written that “Europe visibly aspires to be governed by an American committee.” To Europeans, the International Monetary Fund, which supervised exchange-rate arrangements in the post-Bretton Woods world, looked like a perfectly American committee, and France did not like that.
The Werner Report’s ideas were too feeble to deal with the currency turmoil of the early 1970’s, and it was almost a decade before Europe produced a new response. The European Monetary System began as a high-level reaction to global currency chaos, and in particular to the depreciation of the dollar in 1977 and 1978, which seemed to threaten its continued role as the major international reserve currency.
The process that began with the report of the Delors Committee in 1989 and led to the Maastricht Treaty in 1992, the establishment of the euro in 1999, and the introduction of the physical currency in 2002 was rooted in an attempt to devise mechanisms that would generate a more stable global exchange-rate regime.
The critical policy innovators of the late 1980’s, in particular the highly activist French Finance Minister Edouard Balladur, took an international answer and started to advocate its realization on the European level. At the G-7 meeting of finance ministers in Louvre in February 1987, Balladur suggested a system of currency target zones; when its realization proved problematic, he pushed on with a more definitive and tighter European version of the scheme.
What resulted was a partly flawed answer to the problem. That was because France and Germany, the principal protagonists in the drama of monetary integration, had different visions of how the problem should be solved. The Germans pressed for clearly defined fiscal rules, but other countries wanted more wiggle room. The French argued for European economic governance alongside the monetary union, but that looked to others as imposing too much French planisme. A watered-down version of the German solution was eventually adopted.
Today, as in the 1960’s or 1970’s, we face a fundamentally global problem of inconsistent monetary policies. Back then, Europeans complained that low interest rates in America were driving global inflation; now low US interest rates are blamed for driving irresponsible asset-price booms.
Indeed, low US interest rates, though an appropriate domestic response to the financial crisis, have pushed a global carry trade in which people borrow in dollars to fund investments in the apparently less crisis-hit large emerging-market economies. These large transactions are funneled through the international banking system.
The answers to a global problem of this kind cannot be found on a European level. It will demand global coordination of monetary policies, and some form of global economic governance. Europe tried this combination, and found that even in a regional setting it could not be fully realized. Instead, an imperfect answer produced heightened vulnerability. The result is that Europe has made itself into the primary victim of the financial crisis.
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