Pressure grows in Germany to devalue euro
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Submitted by cpowell on 01:33PM ET Monday, November 9, 2009.
Section:
Daily Dispatches Europe's Industry Slams China Over Currency
By Ambrose Evans-Pritchard
The Telegraph, London
Monday, November 9,
2009
http://www.telegraph.co.uk/finance/economics/6533287/Europes-industry-sl...Europe's industry federation has called for urgent measures to cap the
surging euro after it blasted through $1.50 against the US dollar and 10.25
against China's yuan on unexpectedly strong data from Germany.
"I am deeply concerned about recent exchange rate developments," said Jurgen
Thumann, president of Business Europe, the pan-EU lobby.
"An overvalued euro is not good news for growth and is inconsistent with the
commitments of the G20 countries for an orderly resolution of global imbalances.
We must insist that our partners honour their commitments."
He was addressing his words directly to top officials from the European
Central Bank and the Eurogroup in Brussels.
China has held the yuan fixed to the dollar despite its huge trade surplus
through vast purchases of foreign bonds. This has allowed it to flood Europe
with cheap exports, gaining market share on the coat-tails of dollar
devaluation.
Mr Thumann called on EU leaders to "push the message" in Beijing that China
must let the yuan rise.
There is growing irritation over the apparent insouciance of EU officials in
the face of the euro's 24 percent rise against the dollar/yuan since March.
China's central bank governor, Zhou Xiaochuan, let slip at the G20 summit
that global pressure for yuan appreciation "is not that big".
Germany has so far seemed able to shrug off the currency effects. Exports
jumped 3.8 percent in September from a month earlier.
However, a study by Ansgar Belke from Duisburg University found that even
Germany has clear limits. Berlin's pleasure in the muscular performance of the
euro is likely to prove "nasty, brutish, and short", he said.
"Firms with standard products exposed to the biting winds of international
competition have a huge problem with a strong euro," he said. Germany's small
and medium-sized family firms produce locally and cannot switch plant abroad.
Currency hedging is complex and costly.
Mr Belke said the "pain threshold" varies by sector but overall demand for
German goods will "fall dramatically" if the euro goes above $1.55 for long.
Furthermore, it will do lasting damage as firms lose their global foothold. Many
will struggle to re-enter these markets even if the euro falls again. Currency
effects are slow but powerful.
Professor Willem Buiter from the London School of Economics said the ECB has
made an error by pushing the euro too high through tight-money policies. "The
German export industry has learned to cope by wage restraint and productivity
gains. This is not something that other countries can emulate easily," he said.
"There is going to be some egregious suffering."
IMF data shows that Spain and Italy are overvalued by more than 30 percent.
Germany's car scrappage scheme and a rebound in inventories have lifted the
country out of recession but from a very low base. Exports are still down 19
percent from a year ago. The Bundesbank says the economy may not regain its
former output until 2014.
Recovery is not secure in any case. Private credit in the eurozone contracted
for the first time in September.
Germany's Bank Federation has given warning of a "generalized credit crunch"
next year due to the delayed effect of rising defaults and G20 pressure for
higher capital ratios. Business Europe called on regulators to move carefully as
they clamp down on banks. "We have absolutely no idea of the overall impact on
our economy," it said.
European firms raise two thirds of their debt from banks, compared with one
third in the US. "Company investment in machinery and equipment is already down
more than 20 percent since last year. We need to reverse this trend rapidly.
Otherwise we will never get back on our former growth track," it
said.
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