LUXEMBOURG: Irked by the relentless ascent of their currency, euro zone finance ministers have decided to target Chinas yuan as the chief culprit in a quest for fair play on global exchange rates and trade.
They made the point after talks on Monday to agree a common stand for a meeting of the G7 industrialised powers — the United States, Japan, Canada, Britain and euro-zoners Germany, France and Italy — on Oct. 19, a meeting at which China will be absent.
In a statement issued overnight, the euro zone ministers reiterated pleas to financial markets to heed U.S. statements that a strong dollar was in U.S. economic interests and urged them again to take account of Japans improving economy.
But the novelty was the focus on China, where Europe has until now let Washington do most of the tough talking, with limited results.
“First point China, second point dollar, third point yen,” Jean-Claude Juncker, chairman of the meeting, said.
He and European Central Bank President Jean-Claude Trichet will visit Beijing before the end of the year with European Economic and Monetary Affairs Commissioner Joaquin Almunia.
“In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur,” the euro zone statement said.
FED UP
The euro has risen more than 20 percent against the dollar and yen since its launch in January 1999, and the appreciation has been around 10 percent in just the last 12 months.
China has allowed its currency to rise marginally versus the dollar over the past two years but has let it slide against the euro in equal proportion, compounding the feeling that the euro zone is carrying the can for currency mismatches.
“We note that the euro is playing its role for an orderly reduction of the imbalances,” the euro zone statement said.
While a rising euro can help limit the cost of oil, which is priced in dollars, and thus curbs inflation, it makes it harder for exporters to compete on price in world markets, where the yuan also sets a benchmark that many others in Asia follow.
Euro zone ministers are joined by their colleagues from the rest of the European Unions 27 countries on Tuesday.
Mondays talks were billed as a test of how broadly the 13 euro zone governments shared the view that the exchange rate was getting out of hand and how determined they would be to press the case in the G7, where the United States and Japan are far from rushing to the rescue.
China is not a member of the G7 although its economy is now the worlds fourth largest and its exchange rate has caused friction since the country joined the World Trade Organisation in 2001, triggering a boom in its exports.
PAPERING OVER THE CRACKS
France has complained loudly in recent weeks about the strength of the euro, with clear support from Italy, but Germany, the worlds top exporter, kept its distance.
German Finance Minister Peer Steinbrueck did so again as the ministers convened on Monday, telling journalists as he entered the Luxembourg meeting: “I prefer a strong euro.”
His Dutch and Austrian colleagues took a similar line.
That jarred with a campaign being waged by French President Nicolas Sarkozy, but French Finance Minister Christine Lagarde, regularly reduced to the role of emissary, said she was happy with the outcome of the Luxembourg talks.
“After good debates we came to final conclusions that we shared and that we all support in anticipation of the G7 meetings, so that is good, that is excellent,” she said.
Whether Sarkozy will consider it sufficient and stop urging the ECB to reduce its interest rates, one of the prime determinants of the euros exchange rate, is another thing.
Europe is not alone in finding fault with exchange rates.
Rodrigo Rato, head of the International Monetary Fund, said in newspaper interviews the U.S. dollar was undervalued and he also urged greater flexibility from Beijing on its currency.
European officials have admitted in private that Washington is no more willing than in the past to lend Europe a hand if the euro zone demanded it.
It may even be happy to see the dollar weaken for the sake of its exports, at a time when the U.S. economy is struggling with a housing downturn and a mortgage crisis that has triggered a global credit squeeze.
Without G7 consensus, or at least U.S. support, the markets see next to no risk of central banks intervening in an attempt to impose their will.
(With reporting by Marcin Grajewski, Paul Carrel, Huw Jones, Anna Willard, Valentina Za, Yves Clarisse and Ilona Wissenbach)
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