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ByBrad Setser

Memo to the EU.   Where have you all been?   China considered a bigger initial move last year, but rejected it.  I don’t think there is any reason to doubt China’s Premier, who clearly has said that China doesn’t plan any more step revaluations.   What is the proverb used to describe China’s approach to exchange rate reform?  Something like “crossing the river by touching every stone.”    

China’s leadership, for better or for worse, is extremely cautious.  They were truly very worried – excessively worried in my view – about the impact of any move in the peg.  They wanted to study the impact of the initial move before they moved further.   Those initial studies are now in.  That is one reason China seems willing to allow a tiny bit more movement.  But even now, they rather clearly intend to move at a very measured pace.  

There isn’t any real risk that the RMB will be allowed to appreciate too fast.  Nor is there any real need for Europe to warn against the risk of too much volatility in the dollar/ RMB.

I long argued that Europe has done more to contribute to “global balance of payments adjustment” than American critics of Europe’s slow growth typically acknowledge.     Europe’s hasn’t grown fast (setting frothy Spain aside), but it has let its exchange rate adjust.   And that counts.  

To over-generalize:

Emerging Asia = solid growth and no exchange rate moves. China being the main example.   

Europe = slow growth and big exchange rate moves.    

And generally speaking, US exports to Europe have grown faster than US exports to emerging Asia over the past few years despite Europe’s far slower growth.  Exchange rates matter, not just growth differentials.  The fall in the dollar against the euro between 2002 and 2004 also helps the US in other markets.

I am curious: How exactly does the EU think the global economy should adjust if the exchange rates of surplus countries shouldn’t’ be allowed to appreciate too quickly?  Particulalry if 1% since July pushes the “too quickly” border?  

The Europeans certainly were singing a rather different tune when the dollar was falling and the RMB was following it down. 

I should also note that oil is kind of high right now.    Chinese exchange rate policy generates an enormous amount of ink.  As it should.   It has profound implications for the global economy.    So does $70 oil.

High oil hasn’t slowed the global economy.  But it is the core reason why Chavez and others are cash rich.  It also doesn’t help GM.   And if you didn’t notice, GM did not have a good March.  Toyota did. That may show up in the trade data too …