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Pressure grows in Germany to devalue euro
Europe's Industry Slams China Over Currency
By Ambrose Evans-Pritchard
The Telegraph, London
Monday, November 9, 2009
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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