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Lectura GIE lección 1
Europe must look east to deal with the euro
By Fred Bergsten
Published: October 11 2007 18:54 | Last updated: October 11 2007 18:54
The euro has recently hit a succession of record highs against the dollar. A number of European leaders,
including Nicolas Sarkozy, the French president, and Jean-Claude Juncker, chairman of the group of 13
eurozone ministers, have called on the US to take action to halt the trend. The issue will be high on the
agenda of the forthcoming Group of Seven leading industrialised nations and International Monetary Fund
meetings in Washington. The eurozone should look to Beijing rather than Washington, however, if it wants
to avoid the costs to its economies of a much stronger currency.
The bad news for Europe is that the dollar is likely to decline by at least another 15-20 per cent on
average. Growth differentials have now moved against the US, which may experience the slowest
expansion of any G7 country in 2007. Differentials in short-term interest rates have correspondingly moved
against the dollar. The US current account deficit is still running close to 6 per cent of gross domestic
product and, along with America’s own capital outflow, requires financing through an unsustainable $7bn
of foreign capital inflow every working day. The sharp pick-up in US productivity growth that underpinned
the strong dollar for a decade has been fading. The euro creates a meaningful international competitor for
the dollar for the first time in a century and will attract continuing portfolio diversification from around the
globe, including the super-rich sovereign wealth funds.
The good news for Europe is that most of the remaining decline of the dollar should take place against the
currencies of the East Asians and the oil exporters. They are running the counterpart surpluses to the US
deficits. They have piled up massive foreign exchange holdings that already far exceed any plausible
needs. They are enjoying rapid economic growth that could most easily accommodate the reductions in
external surpluses.
Many of them need to shift their growth patterns to domestic expansion for internal reasons. A few of the
surplus countries have moved in this direction. The currencies of South Korea, Indonesia and Thailand
have risen more against the dollar than has the euro. Kuwait has abandoned its dollar peg and let its rate
float upward.
But the exchange rates of the largest surplus countries of Asia have barely budged. China is, of course,
the most blatant case. Its global current account surplus is likely to exceed $400bn in 2007, more than half
of America’s global deficit. This will represent more than 12 per cent of its GDP and provide one-third of its
total economic growth. The renminbi needs to rise over the next several years by a trade-weighted
average of more than 30 per cent, and much more than that against the dollar, as part of a broader
rebalancing of China’s growth strategy towards relying more on domestic consumption than on investment
in heavy industry and climbing trade surpluses.
China claims to have adopted a market-oriented currency policy in July 2005. At that time, it was buying
$20bn- $25bn monthly in the foreign exchange markets to block appreciation of the renminbi. It is now
intervening at $40bn-$50bn per month. On that metric, its exchange rate is about half as market-oriented
as two years ago. It is thus no surprise that the renminbi’s rise of about 10 per cent against the dollar over
this period was more than offset by the dollar’s fall against other currencies, so that China’s average exchange rate is weaker today than it was then, or in the early part of this decade when China’s current
account was near balance and the dollar was at its record peak. Nor is it a surprise that China’s external
surplus continues to soar.
Many other Asian countries hold their currencies down, through sizeable intervention of their own, to avoid
losing competitive position to China. This is especially true of Hong Kong, Malaysia, Singapore and
Taiwan. Most of the large oil exporters intervene heavily to maintain undervalued pegs to the dollar as
well. Japan’s currency is also substantially undervalued, though due to its appropriately easy monetary
policy rather than any official manipulation. A substantial rise of the renminbi would almost certainly pull at
least the other Asian currencies, including the yen, up with it.
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The problem for Europe is that the inevitable further decline of the dollar will continue to occur mainly
against the euro unless the large Asian countries and oil exporters permit substantial increases in the
value of their currencies. Hence eurozone leaders should be addressing their concerns to Beijing, and to
some extent Tokyo and Riyadh, rather than Washington, especially with the US current account deficit
now falling and the budget deficit for fiscal 2007 at a mere 1.2 per cent of GDP. Even if the euro were to
rise a bit more against the dollar, large appreciations from the Asian countries and oil exporters would limit
or even negate any further increase in its trade-weighted average and thus in the eurozone’s global
competitiveness.
Rather mysteriously, Europe has been largely absent from efforts to address global imbalances over the
past three years, in spite of warnings that it had the biggest stake in a geographically diversified outcome.
The obvious places to start are effective implementation of IMF rules against competitive currency
undervaluation and “prolonged, large-scale one-way intervention”, and the World Trade Organisation rules
against “frustrating the intent (of the Articles) by exchange action” and export subsidies, as Ben Bernanke,
Federal Reserve chairman, has labelled China’s currency practices. Perhaps a euro at $1.50 or $1.60 will
focus European minds on these imperatives.
The writer is director of the Peterson Institute for International Economics
Copyright The Financial Times Limited 2007
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