European Union

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports. 

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that's possibly true.  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? 

Over at the Financial Times, Gideon Rachman looks back at the G-20 Pittsburgh summit and thinks that Europe will take over the G-20 process: 

The realisation that the G20 is Europe’s Trojan horse struck me at the G20’s last summit in Pittsburgh a couple of weeks ago. The surroundings and atmosphere were strangely familiar. And then I understood; I was back in Brussels, and this was just a global version of a European Union summit.

It was the same drill and format. The leaders’ dinner the night before the summit; a day spent negotiating an impenetrable, jargon-stuffed communiqué; the setting-up of obscure working groups; the national briefing rooms for the post-summit press conferences.

All of these procedures are deeply familiar to European leaders – but rather new to the Asian and American leaders whom the Europeans are carefully entangling in this new structure. Watching an Indonesian delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. “You don’t know what you are getting into,” I thought. “You are going to waste the rest of your life talking about fish quotas.” (Or, this being the G20, carbon-emission quotas.)

The Europeans did not just set the tone at the G20 – they also dominate proceedings, since they are grossly over-represented. Huge countries such as Brazil, China, India and the US are represented by one leader each. The Europeans managed to secure eight slots around the conference table for Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Most of the key international civil servants present were also Europeans: Dominique Strauss-Kahn, head of the International Monetary Fund; Pascal Lamy of the World Trade Organisation; Mario Draghi of the Financial Stability Board.

As a result, the Europeans seemed much more tuned into what was going on than some of the other delegations. Puzzling over the new powers given to the IMF to monitor national economic policies in the Pittsburgh conclusions, I was interrupted by an old friend from the European Commission, who recognised the language immediately. “Ah yes,” she said, “the open method of co-ordination.”

Hmmm..... no, I'm not buying this.  Or, to put it another way, if the G-20 is a European plot, then it would be the worst plot since.... insert your least favorite M. Night Shyalaman film here.

Sure, the Europeans are overrepresented at the G-20.  But compare that to the G-8, where (when you factor in the EU), they occupied more than half of the chairs around the table.  The G-20 doesn't augment the power of Europe -- it dilutes it. 

This interpretation fits with what I heard from some of the G-20 participants as well.  There was a surprising degree of common cause between the BRIC economies and the United States in the run-up to Pittsburgh.  Given the outcome, there is an obvious explanation for the BRIC economies' behavior. 

Why did the U.S. go along?  Washington maintains stronger bilateral ties with each of the other G-20 members than most do with each other.  If one thinks of the United States as the central node in a more networked governance arrangement, then one can see how the reforms made to date do not weaken American influence.  The primary loser, then, is Europe.

Maybe Gideon will be proven correct -- it's certainly true that the Europeans might have a comparative advantage in this kind of diplomatic death-by-detail approach.  On the other hand, the Americans and Russians aren't exactly newbies at this.  The Chinese and Indians have been moving down the learning curve pretty fast.  And the Brazilians already have a reputation for being diplomats who punch above their weight. 

Developing....

My observations and reportage from the first day of the 2009 Brussels Forum:

1. The day starts with me being seated next to the CEO of The Elders.  In a display of profound cowardice discretion on my part, I choose not to mention this blog post at all. 
2. The session opens with German Marshall Fund president Craig Kennedy thanking the myriad donors -- Fortis, Daimler, the Belgian government, the Latvian defense ministry, etc. I think to myself, "how many of these institutions will not go bankrupt this year?"
3. The first session featured Bob Kagan, Anne-Marie Slaughter, Carl Bildt, and Mark Malloch Brown, moderated by the BBC's Nik Gowing.  The most revealing thing said during the session was when Kagan confessed, "I don't understand anything that is going on in the economy."  This is a big problem with foreign policy wonks -- to many of them know too little about economics (this explains my man-crush on Bob Zoellick, by the way).  Props to Kagan for at least admitting this fact. 
4. The second most revealing thing about the session was when Gowing offered John McCain a chance to say something/ask a question from the audience, and he passed.  What a difference a year makes.
5. Beyond that, there was mostly a lot of sniping between Slaughter and Kagan.  Slaughter is still moving down the learning curve on speaking in sound bites -- at one point she said "Europe has a plural head, but still one head."  Kagan has done this many times before, and was therefore a bit sharper.  On the other hand, he did not like being pushed into such an oppositionalist position by Gowing.  Afterwards he lamented, "I'm don't want to be the Simon Cowell.  I Why can't I be Paula Abdul!" 
6. Senator Bob Casey (D, PA) then gave a very long-winded introduction of the congressional delegation.  This was boring, except for the fact that Casey forgot to introduce McCain.  Again, what a difference a year makes. 
7. European Commission president Jose Manuel Barrosso was next on the docket.  He tried his best to argue that the EU was doing its part on fiscal expansion, that the just-concluded EU summit was a success, and that the transatlantic partnership was never better.  It was, in other words, pretty boiler plate.  Later in the evening, Czech Prime Minister Mirek Topolanek undercut each of Barrosso's talking points.  He described the same EU meeting as "difficult," and challenged the EU to "speak less and participate more."  Topolanek then declared that, the "Eurocentric days are over" for the United States. 

That's all for now.