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Analysis
Mood music shifts to Asia

Mood music shifts to Asia

Sarkozy’s statement on ECB breaches pact with Merkel

Asians are working together while Europe drifts apart

by David Marsh

Mon 16 Apr 2012

Three great authorities on economic and monetary union (EMU) spoke out last week, in Paris, Berlin and London. But the real mood music on the future of the euro is playing far away, in Beijing and Tokyo. Softly for the time being, but with tones that may over time become more dissonant.

President Nicolas Sarkozy, irrepressible as ever, told a giant Parisian rally on the spot where Marie Antoinette was beheaded 219 years ago that the European Central Bank had to support Europe’s growth strategy. That’s what he has always believed, but saying it out loud goes against the grain of a strategy carefully agreed with Angela Merkel last November. No wonder she’s not, after all, travelling across the Rhine to campaign with him ahead of the first round of the presidential elections on 22 April.

Financier and philanthropist George Soros was in Berlin last week with a similar message, warning the Germans of impending doom in EMU unless they step up to the plate, boost growth and behave somewhat more generously towards hard-up states.

The message in London of Jean-Claude Trichet, former president of the European Central Bank, was that Europe had to unite or else face being ‘dwarfed’ by the rising powers of the East. Trichet believes EMU has the innate power to overcome its problems, in view of the extreme political and historical dynamism built into the European project.

The remarks of these luminaries are undoubtedly significant. Trichet, in particular, has a point. The field on which the single currency’s future will be played out is shifting, slowly but perceptibly, away from European capitals to Asia.

China and Japan, the two big Asian creditor nations, are quietly but significantly flexing their monetary muscles. For different reasons, and from very different starting positions, both countries wish to step up the internationalisation of their currencies. A significant sign came with the Christmas agreement for the two countries to forge significant reciprocal swap lines in yen and renminbi, and for the two central banks and finance ministries to hold each other’s government bonds in their official reserves.

These measures, and further steps since then, can be construed as establishing important competition for the dollar and the euro on the international capital markets. Neither China nor Japan wants the euro, as the second most important reserve currency, to collapse. Its continued existence protects the Asians from the abuse of power that would certainly ensure if the US were to enshrine a monopoly position as No. 1 reserve currency country.

On the other hand, Beijing and Tokyo seem to be preparing themselves for the possibility that, in a few years, if EMU’s inherent political weakness continues, the euro could bow out as a serious contender to the dollar on the world stage. In which case, the yen and renminbi (assuming the Chinese press ahead with liberalisation) could fill the vacuum.

Much is missing in long-term stabilising elements supporting EMU. It is precisely in this area, applied to their own currencies, where the Chinese and Japanese are making important strides. Although it will still take many years before the Chinese currency gains full convertibility, the political will is now unmistakable behind the renminbi’s promotion as a trading, transaction, capital market and reserve currency. The yen has been an international currency for decades, but the Japanese authorities have been working behind the scenes over the last 12 months to intensify the yen’s attractiveness, as a means of encouraging capital inflows made necessary by changed economic and energy supply circumstances since the earthquake in March 2011.

So the Chinese and Japanese are working more closely together – and the Europeans are drifting apart.

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