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Wednesday, April 24, 2013

China’s Yuan To Be More Market-Driven

According to the Wall Street Journal, “China's central bank plans to widen the yuan's trading band in the near future, People's Bank of China Vice Governor Yi Gang said  . . . , suggesting that China's leaders will press ahead with change despite the surprise slowing of the economy. ’The exchange rate is going to be more market-oriented,’ Yi said on a panel at the International Monetary Fund’s 2013 spring meetings in Washington. ‘I think in the near future we are going to increase the floating band even further’.” The yuan had risen 0.9% against the US dollar since the beginning of the year, and 1% the previous year. With exports becoming more expensive as a result, the Wall Street Journal reported in April 2013, “China's economic growth slowed to 7.7% in the first quarter, year-over-year, down from 7.9% in the last quarter of 2012. That was well below expectations, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies. Mr. Yi's comments are an early indication that China will continue to focus on market-oriented reform even if that might make it tougher for exporters who would prefer a cheaper yuan.” The implications are more profound than merely shrinking exports.
 
                                    The yuan in 2011. The steadily rising value suggests that the market viewed the currency as being undervalued. 
                      
With labor costs steadily rising in China and the rising prices of crude oil making shipping half way around the world more expensive, some American corporations began to reassess manufacturing domestically. A trend in this direction would reduce American unemployment, and thus the U.S. budget deficits as there would be less demand for unemployment compensation and food-stamps and more tax revenue. It is not as though it could be expected that everyone in the U.S. would participate in a “non-manufacturing” knowledge economy. To reach full employment, an economy must be diversified and thus able to tap into the various types of labor. It is not as though people are clones, having the same aptitudes.
In the U.S., the unemployed would stand to gain while discount store customers would lose the once-cheap Chinese imports. That is to say, a rising yuan is not entirely in Americans’ interest, financially. On the other side of the world, a rising currency is not necessarily contrary to China’s economic interests. In order to move to a more viable economy, the Chinese government had been urging more domestic demand so the economy would not be so dependent on exports. A recession in the U.S. and E.U. could mean a major downturn in an exports-oriented Chinese economy.
From a big-picture perspective, balance or equilibrium in the global economy is in everyone’s financial interest. Keeping a currency artificially low is like a dam keeping waters from reaching a balance. The pressure from the held-up water can be expected to destabilize the global economy. China’s policy to gradually let the yuan’s value be market-determined is thus a prudent step.

Source:
Natasha Brereton-Fukui and Bob Davis, “China Vows Wider Yuan Movement,” The Wall Street Journal, April 17, 2013.

Monday, April 22, 2013

The E.U. as Peace-Maker: Bringing in Serbia and Kosovo

Serbia and Kosovo reached an agreement on April 19, 2013 bearing on how much autonomy Kosovo would allow Serb cities in return Serbia’s recognition of Kosovo’s remaining authority in the cities. Kosovo had seceded from Serbia in 2008, and the ensuing conflict kept both states from joining the European Union. As it turned out, the prospect of accession gave both Serbia and Kosovo enough incentive to reach an agreement. Indeed, only a few days after the agreement had been reached, the governments of Serbia and Kosovo approved it. Such swiftness indicates how strong of an incentive accession can be for belligerent republics in Europe. The E.U.’s deployment of this “carrot” is fully in line with the main objective of the European Union: to prevent war in Europe. According to the New York Times, the accord is thus “an important victory” for the E.U.

 
In the wake of World War II, the European Coal and Steel Cooperative was formed in order to keep an eye on Germany’s use of iron, should the Germans seek to re-militarize. The EEC was also formed to obviate war in Europe, and the E.U. inherited this central aim. Accordingly, it is fitting and proper that, as Kosovo’s deputy minister of foreign affairs, Petrit Selimi put it, “The incentive of joining the E.U. played a huge role in clinching an agreement.” The E.U. thus played a role in forging greater peace in Europe. In fact, the negotiations took place in Brussels, according to Catherine Ashton, the E.U.’s secretary of state. “It is very important,” she told reporters, “that now what we are seeing is a step away from the past and, for both [Kosovo and Serbia], a step closer to Europe.” Days after the agreement was signed, the European Commission recommended to the European Council  that talks start on Serbia’s accession. Belgrade had “taken very significant steps and sustainable improvement in relations with Kosovo,” the Commission announced. The Commission also noted that as Kosovo had met all its “short-term priorities,” talks toward a Stabilization and Association Agreement, a precursor to Kosovo gaining statehood, should commence.

Bringing both Serbia and Kosovo into the Union would represent a more permanent means of forestalling war in Europe. As this depends too on how much power the E.U. has in reconciling conflicts between the states, giving the federal government sufficient competencies in this regard would also represent a step toward sustained peace in Europe. While the prospect of accession has been shown to be enough of an incentive for a meaningful agreement to be reached, better still is the incorporation of trouble spots into the European Union, where more pressure can be brought to bear on any bellicose states such that any nascent conflicts between them can be peaceably resolved. Indeed, the E.U.’s competency, or enumerated power, to remove state obstacles to a common market is in part geared to forestalling potential conflict between discriminating states. This is also a reason behind the interstate commerce clause in the American system.

Lest a fixation on any of the contemporary crises hitting the E.U. inculcates a pessimism that is destructive to the Union and thus ruinous to its more basic purposes, it should be helpful to keep an eye raised to one of those fundamental aims of the project. Given the two major wars in Europe during the first half of the twentieth century, it is wise to keep perspective regarding the role of the E.U., both directly and indirectly, in obviating war.

Sources:

Dan Bilefsky, “Serbia and Kosovo Reach Agreement on Power-Sharing,” The New York Times, April 20, 2013.

Vanessa Mock and Gordon Fairclough, “Serbia Ready for EU Accession Talks,” The Wall Street Journal, April 22, 2013.
 

Sunday, April 21, 2013

Britain Challenges the E.U.’s Financial Transactions Tax

In April 2013, the state of Britain mounted a legal challenge at the European Court of Justice against E.U. financial transactions tax (FTT) going into effect in eleven other states. The way in which the challenge was depicted by state officials in Britain suggests that the real challenge was not just to more European integration, but also to the E.U. itself.
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.