Well, there we have it. The overlord of one of the weirdest experiments in trade policy just got in a helicopter and flew off to the strains of “Y.M.C.A.”. It’s unlikely anyone will try any combination of strategies quite as eccentric as Trump’s ever again. Why? Well, because, erm, they didn’t actually work, particularly against China, as we examine in Tall Tales below.
Today’s main piece is on how the EU complains about the global dominance of the dollar — one area where the US does retain enormous power in the international economy — but balks at doing the necessary to challenge it. Charted Waters looks at the renminbi’s rise in value against the dollar.
Tremendous timing from the European Commission, real pro-level stuff, to release a paper about boosting the international role of the euro the day before Joe Biden’s inauguration. Did the new president lie awake last night in the White House, reading the report with foreboding? Did he look up to watch the shadows flickering on the wall, seeing in them a portent of the dollar’s global might receding into darkness?
Probably not, to be honest. In the decade since the financial crisis, the euro’s global role as measured by its use in official reserves, trade invoicing, international bonds and bank lending and currency market turnover, first declined and then stagnated. At present, euro-denominated assets account for slightly more than 20 per cent of official sector reserves, compared with slightly more than 60 per cent for the dollar. The European Central Bank, whose governing council meets today, has much less international impact than the Federal Reserve. Even inane fiscal mismanagement by Trump and the Republican Congress hasn’t dented the dollar’s dominance.
This rankles in the EU, and not just because of the traditional concerns about seigniorage — that is, the revenue earned from the production of banknotes — and hedging costs and so on. As my colleagues pointed out in Monday’s Brussels Briefing, there’s great frustration with the US using the dollar payments system to sanction European as well as American businesses and banks dealing with countries such as Iran.
Here comes the irony, though. The eurozone authorities have been talking about rivalling the dollar since the euro’s launch in 1999. There’s a solid case, with some extremely eminent proponents for a multipolar global currency system backing the idea. Last year, the eurozone made the most important shift yet, the rapid expansion of common EU debt as a result of the recovery programme. But without investors being able to access a deep pool of safe assets akin to US Treasuries, the euro will always struggle to rival the dollar.
In fact, you’d struggle from the EU’s communications to deduce any Rubicon action going on. The report does discuss those bonds in the context of deepening the capital markets union, but doesn’t exactly showcase them as a vital tool for internationalising the euro. It devotes a lot of space instead to the usual consultative/facilitative stuff — asking traders in energy markets to price contracts in euros, increasing transparency in euro-denominated bond markets, talking to companies about why they invoice in dollars and so on — all of which is much more marginal. EU officials briefing on the report earlier this week said of the joint borrowing: “It’s a new asset, it’s a safe asset, but it’s not equivalent to a US T[reasury] bond . . . we have constructed our ideas around capital markets union [without] relying on the existence of a safe asset.”
Why so bashful? To simplify and exaggerate: Germany. Berlin doesn’t like talk of joint EU liabilities, seems to regard the Bund as the only safe benchmark asset any reasonable person would ever need and is much less keen on internationalising the euro than, say, France.
That’s a longstanding position. Germany is the anchor of the euro, but German economic policy has traditionally had a mercantilist manufacturing bias orientated towards competitive exchange rates rather than developing financial services and creating a global currency. In the 1970s, after the dollar-centred Bretton Woods exchange rate system collapsed, West Germany got a chance to have the Deutsche Mark supplant some of the dollar’s international role, but actively discouraged it.
Nor is the eurozone undertaking a cunning stealth operation, quietly expanding a pool of interchangeable safe assets but keeping it quiet from the German public. Other aims for the EU’s joint borrowing, namely issuing “green bonds” to fund environmentally progressive investment, are taking priority.
The increase in euro-denominated green bonds, including by non-eurozone residents, has been impressive. But as the fine people at the Brussels think-tank Bruegel point out, green bonds are likely to be segmented from conventional public debt by tricky governance issues needed to ensure they are genuinely financing new environmentally friendly investments. The EU is choosing green borrowing, or the appearance of it, over creating a homogeneous safe asset pool. It’s not necessarily the wrong choice, but it’s a choice nonetheless.
Fundamentally, the EU isn’t enthusiastic enough to make the necessary trade-offs. Member states are (entirely understandably) irritated about being bullied by the US over sanctions, but not enough to overcome concerns about letting jointly guaranteed borrowing rip.
The eurozone’s governments collectively would like to internationalise the euro in the way most people would like to win Olympic gold at gymnastics: cool in principle, but in practice a lot of effort and sacrifice with no guarantee of success. Easier to sit on the sofa moaning that the Americans are hogging the medals again. At this rate we’d be very surprised if the dollar was seriously challenged as the pre-eminent international currency any time this decade. Biden has an inbox full of problems, but a significant threat to the primacy of the greenback isn’t one of them.
On the topic of currencies that play an important role in world trade, Hudson Lockett, the FT’s Asia capital markets correspondent, has put together the chart below, which shows analysts have very mixed views on what will happen to the value of China’s currency this year.
So far this year, the renminbi has surged against a notably weak dollar. But there is a lot of uncertainty about what comes next, with some forecasting the currency could surge to almost Rmb6 against the greenback, and others expecting it to fall as low as Rmb7.
The renminbi, which is closely managed by China’s central bank, is now at a two-year high.
Trump’s departure will deprive Trade Secrets of the most reliable Tall Tales generator we have ever known, better even than Brexit. It’s a bittersweet moment.
So let’s do a final one in the form of departing US Trade Representative Robert Lighthizer’s claim in his Financial Times interview to have “changed the dialogue” on China. Well, hmmm. Going after Chinese distortions on trade wasn’t exactly a novel idea: it was the number-one goal of US international economic policy from the early 2000s, initially focused on currencies. Trump’s innovation was the use of unilateralist sanctions on a vast scale to force a move to managed trade with its Phase 1 deal.
The only problem was: it didn’t work. The US deficit with China hasn’t been fixed. China is way behind its Phase 1 import purchase commitments, and Covid-19 isn’t a proper excuse. Beijing hasn’t shifted from its drive towards economic nationalism, and no one really thinks its supposed concessions on intellectual property and so on are going to stick.
Far from staking out a fiercely uncompromising position, Lighthizer basically got rolled, and left Trump vulnerable to Democratic attacks for being soft on Beijing. As the Cato Institute’s Simon Lester sagely points out here, the Trump/Lighthizer legacy on trade is basically a long list of cautionary tales. I guess you could say Lighthizer did change the dialogue on China, but it’s unlikely anyone’s going to be reusing his lines in future.
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