Asia torn between European incompetence and American cynicism
by David Marsh
Mon 1 Aug 2011
Please read the accompanying two briefing notes on the state of the euro following the Greek rescue package
http://www.omfif.org/downloads/OMFIF EMU briefing 010811 part one.pdf
http://www.omfif.org/downloads/OMFIF EMU briefing 010811 part two.pdf
In frequently contorted negotiations with the Italian government, Margaret Thatcher, the former British prime minister, liked to say she never knew whether Rome officials’ studied vagueness and multiple opacities were due to incompetence or guile. In trying to assess the impact on their economies of the structural disarray behind the two main world currencies – the dollar and the euro – officials in Asian central banks and finance ministries are in much the same position. European governments are guilty of incompetence, but this, they say, can and will be put right. America, on the other hand, is cynically misusing its position as owner of the world’s premier reserve currency to wreak havoc on the economies of the emerging world.
Broadly speaking, Asia sees the danger from the problems overhanging the US economy as far more troubling than the deep-seated flaws besetting the euro. Despite some scepticism about the lack of detail in the European rescue plan decided by heads of government on 21 July, Asian reserve holders continue to express considerable verbal support for the euro. Diversification is the name of the game. The euro needs to remain in existence as an alternative to what would otherwise be a dangerous monopoly of the dollar.
For Asian investors, the dollar’s threat to world monetary stability stems in equal measure from the overriding fear of a further bout of quantitative easing and the negative outlook for public sector debt, even if – as now seems likely - the government avoids a default on 2 August. Hence the long-running recriminations that US monetary and fiscal laxity is driving footloose international capital into fast-growing but inherently unstable emerging market economies, increasing financial market volatility, adding to inflationary pressures and greatly complicating control of economic policy. Hence last week’s criticism published by China’s state news agency Xinhua: ‘The ugliest part of the saga is that the wellbeing of many counties is in the impact zone when the donkey and the elephant fight.’
Nothing new under the sun. The Chinese commentary is reminiscent of the statement in the 1970s by former Bundesbank chief Otmar Emminger, who termed the Americans as the ‘elephant in the boat’ with the Europeans. John Connally, President Richard Nixon’s notorious Treasury Secretary, told the Europeans in 1971: ‘The dollar is our currency, but your problem.’ Tim Geithner is more diplomatic – but fast forward 40 years and nothing much has changed. Faced with this reality, the Asians are going to cling to the Euro. The single greatest factor underpinning the European single currency is the rest of the world’s deep aversion to being left alone with the greenback.
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