Europe’s China Problem
Paul Krugman has a wise column about the havoc being wreaked by China’s refusal to let its currency get more expensive relative to the dollar. Krugman thinks we should be trying to do something about this. But as Dan Drezner observes, though China’s dollar-linkage policy is a problem for us, it’s a much bigger problem for Europe and other developing countries:
As a matter of direct economic interest, however, why haven’t the Europeans and East Asians been screaming bloody murder about this? China’s policies are forcing them to take actions they don’t want to take — so why aren’t they complaining more loudly about this?
Why?
Optimistically, it’s been my experience that members of other countries tend to have a better appreciation than America does that making loud public demands is often a counterproductive diplomatic approach. But one has to fear that the real culprit here may be the European Central Bank’s weird deflationary bias.
16 Responses to “Europe’s China Problem”
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October 23rd, 2009 at 4:15 pm
We see a real-life case of ‘Beggar thy neighbour’ devaluation strategy on a global scale. Interesting times.
And Europeans should be screaming bloody murder about American, not Chinese, policies. The US economy is still much bigger than China, and the yuan is (more or less) pegged to the dollar.
October 23rd, 2009 at 4:26 pm
Euro and Swiss Franc are expensive, and yet somehow I don’t see much asiatique stuff around here. Certainly not as much as in the US. Somehow they manage to defend themselves.
October 23rd, 2009 at 4:38 pm
Why is Drezner asking such a stupid question?
The Europeans have been making public threats and complaints repeatedly since the CHinese trade boom began, as part of ongoing trade battles over textiles etc.
October 23rd, 2009 at 4:43 pm
And Europeans should be screaming bloody murder about American, not Chinese, policies. The US economy is still much bigger than China, and the yuan is (more or less) pegged to the dollar.
That doesn’t make much sense. The US can’t do too much to prop up the dollar, since its value floats. China, on the other had, completely controls the value of the yuan at the moment. It’s far easier for China to let the yuan appreciate than for the US to get the dollar to appreciate (note the difference in verbs). Your comment makes it sound like the yuan peg is just a curious fact, rather than something that’s completely under the control of the Chinese.
October 23rd, 2009 at 4:58 pm
That doesn’t make much sense. The US can’t do too much to prop up the dollar, since its value floats.
Using “policies” and “The US” in a loose sense, there is a lot the US can do to prop up the dollar: cut the budget deficit, raise the interest rate, have a trade surplus, increase productivity and employment… Of course, it would be very painful or difficult to do this right now.
But the US economy is four times larger than China’s, and the dollar has lost almost half of its value compared to the euro since 2001. This has a much bigger impact on Europe than whatever China does.
In effect, there has been a ‘weak dollar policy’ since Bush; even if no Treasury secretary or Fed chairman will ever admit it. It hasn’t been enough to correct the trade deficit because of Chinese policies, and now Europeans are suffering most. As I said, it is a case of ‘Beggar thy neighbour’.
October 23rd, 2009 at 5:12 pm
But the US economy is four times larger than China’s, and the dollar has lost almost half of its value compared to the euro since 2001. This has a much bigger impact on Europe than whatever China does.
This is a misleading exaggeration since the dollar peaked in 2001. It’s been trading at roughly the same value for the last 4 years and has only dropped 25% over the last 10 years.
October 23rd, 2009 at 5:16 pm
What am i missing here, why againt should anyone care about the Chinese shooting themself in the foot with their backwarded mercantilism? Americans shooting themself in the head instead of the foot doesnt really change that China does not make any sense either. Kind of great for Europe when the Chinese want to work for less than they could. That is unless you adhore to some odd extreme market failure theory.
October 23rd, 2009 at 5:22 pm
Ooh, yes! With any luck, Matt might have found himself a new war to champion!
October 23rd, 2009 at 5:29 pm
mpowell, my statement was neither misleading nor an exaggeration. See here.
In any case, it has been known for a long that the US trade deficit was unsustainable and would require a devaluation of the dollar. You have to distinguish between the problems caused by this current financial crisis and the long-term structural imbalances of the US economy since the 90’s (which may or may not be corrected with this crisis – see the savings rate for example).
October 23rd, 2009 at 5:34 pm
mpowell, my statement was neither misleading nor an exaggeration.
How is it not misleading to pick the peak of an asset to describe it’s ‘decline’ to the present day? The currency was introduced in 1999 at a 1:1 rate and it immediately increased in value. Then the Euro declined for 2 years to its 2001 low before substantially recovering. But you’re going to compare its value today to its 2001 low when it only traded at that level for about a year? I would definitely call that misleading.
October 24th, 2009 at 1:14 am
Matt, you have won the lottery! You are Right in your diagnose of ECB!
Thanks for putting a finger where it matters most.
Now we all be expecting your posts about how the ECB biases are nothing but extensions of German History and why instead of helping to rectify that problem how our Super Star, most powerful lady in the world (before Sonia Gandhi) – Chancellor Merkel – is compounding this problem for ideological reasons.
October 24th, 2009 at 4:00 am
Krugman…is dead wrong. China CAN do and IS doing whatever-the-hell it wants. China, unlike other countries, has not chosen to hitch its wagon to the Wild Horses of the Market Apocalypse.
What Master Krugman does not seem to understand is that the Lord God has not decreed that the laws of supply and demand have to be adhered to if the laws supply and demand are not working your favor. China is protecting its economic sovereignty, as a good country should, including not letting foreigners fuck, in any way, with its currency, especially a currency that is helping drive gaping holes in other nation’s markets that you could sail a container ship through.
On top of this, Commander Krugman has failed to grasp the reality that a New Economic Ord..rr..hold on. What?… Oh God. Oh no… Yes. Yes I see.
Apparently I’ve done it. I’ve really done it. I have just been informed that no one disagrees with Professor Krugman without suffering intellectual humiliation so great that one can never parade his wretched brain around in public again.
I leave you now, to fall on my Gladius.
October 24th, 2009 at 5:08 am
Krugman was wrong about many things in the past, particularly anything related to Europe. See this interview from 1998:
Of course, Krugman has since changed his tone (without admitting he was wrong), unlike Drezner who is still wrong about everything. But they are still the people deemed serious enough to give their opinion on the world today. What can you do?
October 25th, 2009 at 6:42 am
This is one thing that I love about China. When the whole world is crying for recession, this is one country which is continously working towards strict policies.
I thoroughly hate China also because humans are treated as animals there and no one has any right there. A country totally opposite of free economy.
October 25th, 2009 at 6:45 am
Anyone who has read Krugman in detail will know about his tendicies of getting wrong occasionally.
October 27th, 2009 at 12:13 am
[...] cosas más o menos serías. Tenía ganas de meterme a buscar datos y discusiones sobre la pertinaz obstinación de los chinos a mantener su moneda artificialmente baja (tocando las narices a medio mundo) y del Banco Central Europeo a mantener la suya alta (más vale [...]