Almunia: eurozone in firing line of US trade deficit

Date: 18/11/04

It was left to the Economic and Monetary Affairs Commissioner, Joaquín Almunia, to put the spotlight on what worries EU policymakers most about the soaring value of the euro: that it is the eurozone which is first in the firing line as Washington tries to cut its &036;500 billion (386bn euro) trade deficit.

Taking the risk of irritating the notoriously sensitive Chinese, Almunia told reporters that "the Chinese economy will need, as soon as possible, a flexible exchange rate".

"This would help the economy of China and elsewhere," he said.

The Chinese exchange rate against the dollar is in practice fixed by means of massive foreign exchange market intervention. So when the dollar goes down, so does the Chinese yuan. This ensures that Chinese exports to the US do not rise in price and that China's exports to Europe become cheaper. This furthers the Chinese government's development strategy of rapid, export-led, industrialization.

Worse, several other Asian exporting countries, including Taiwan and Malaysia, have also pegged their currencies to the Chinese yuan and therefore the dollar.

The threat for Europe is that, with Asian currencies pegged to the dollar, it is the euro which will rise as the dollar falls and that it is therefore European exporters, and so the eurozone economy, which will bear the burden as America tries to curb its trade deficit.

Were the Chinese to revalue their currency, eurozone policymakers believe, America's other Asian trading partners would follow suit so spreading the burden of rebalancing the global economy.

European Commissioner for Economic and Monetary Affairs, Joaquín Almunia, has called for a flexible exchange rate of the Chinese yuan.