Euro woes increase risk of trade wars

By J Saft
May 20, 2010

Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.

The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.

As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.

That Britain is now embarking on its own round of budget cuts will only make matters worse, adding up to one more important actor trying to consume less and export more courtesy of a devaluing currency.

Perhaps the best outcome is rising trade and currency tensions between the United States and China, while at worst this could set the stage for broader conflicts and a round of tit-for-tat tariffs to match similar currency devaluations.

Michael Pettis, a professor at Peking University, explains the issue succinctly on his blog, in which he says:
“Make no mistake, if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?”

The scale of the adjustment is large; taken together Spain, Italy, Portugal and Greece account for about 16 percent of global trade deficits. Add in France, which will surely share some of the pain, and we get up to about 20 percent. You simply cannot have savage recessions and budget cutbacks in these countries without it exerting a powerful force on their trade partners.

Clearly the first fault lines will not be across the Atlantic. Talk of the potential for coordinated intervention to support the euro, or at least to make its fall against the dollar a two-way market, attest to the strength of U.S.-European relationships. This is a group that managed the 2007 and 2008 conflagration without ending up at each others’ throats.

CHINA MAY BALK AT REVALUATION
Pettis points out that within China there is an attitude that the fall in the euro against the dollar, which has made the yuan correspondingly stronger against the euro, is an argument for caution by China in revaluing its currency.

Remember too that the European Union comprises China’s largest export market, so it will suffer a double blow, once now by a rising currency and again going forward as Europe adjusts.

U.S. Treasury Secretary Timothy Geithner is traveling to Beijing next week to press trade and currency issues. Expectations had been that this would lay the groundwork for some measure of a revaluation of the yuan, which is kept artificially low by the Chinese. The euro zone mess seems to have put paid to that immediate hope. Washington and Geithner are unlikely to want to make already fragile international markets even more so by talking tough next week, but, as the U.S. elections in November near, and, if U.S. unemployment fails to fall, the pressure to take action against China in the form of not just verbal battering but actual tariffs may become too much.

I’d note that the U.S. primary elections on Tuesday showed voter anger is focused on incumbents in general and Washington in specific. It would not be a surprise for the administration to try to focus that anger outside the country.

So, rising trade tensions with China, but there is also a meaningful chance that tensions will rise eventually between the United States and Europe. Thus far European efforts to address euro zone issues have been disorganized and riven by internal dissension. Germany did not, it appears, consult its partners about its short selling plan. While the European Central Bank’s excellent relationship with the Federal Reserve will help, there is a real chance that the euro suffers a disorganized meltdown and that Europe cannot agree among itself about how, or whether, to stop it.

That, especially if combined with Chinese intransigence, could prove to be intolerable for the United States.

Trade wars added greatly to the depth and length of the Great Depression. The world’s ability to avoid a similar fight has been one of the blessings of the last two years.

Not everyone can export their way back into the black, at least not everyone at the same time.

How that is resolved as Europe melts into another recession will be one of the key issues of 2010 and 2011.

(Editing by James Dalgleish) (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

1,058 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Thank you for any other great article. The place else may anyone get that kind of info in such an ideal approach of writing? I have a presentation subsequent week, and I am at the search for such information.

whoah this weblog is great i really like reading your posts. Keep up the great work! You understand, lots of persons are looking round for this info, you can help them greatly.

I think other website proprietors should take this site as an model, very clean and wonderful user friendly style and design, let alone the content. You’re an expert in this topic!

great post, very informative. I’m wondering why the other specialists of this sector do not understand this. You should continue your writing. I am confident, you’ve a great readers’ base already!

hi!,I really like your writing so much! share we be in contact more about your article on AOL? I need an expert in this space to resolve my problem. Maybe that is you! Looking forward to look you.

This is very interesting, You’re a very skilled blogger. I’ve joined your rss feed and look forward to seeking more of your wonderful post. Also, I’ve shared your site in my social networks!|

Howdy! I’m at work surfing around your blog from my new iphone 3gs! Just wanted to say I love reading through your blog and look forward to all your posts! Carry on the fantastic work!|

You need to take part in a contest for one of the highest quality sites on the web. I’m going to recommend this web site!|

I saw something about that subject on Tv final night. Terrific post.

Have you ever considered about including a little bit more than just your articles? I mean, what you say is fundamental and everything. But think about if you added some great graphics or video clips to give your posts more, “pop”! Your content is excellent but with pics and video clips, this website could certainly be one of the most beneficial in its field. Excellent blog!|

I have been browsing on-line greater than three hours as of late, yet I by no means discovered any fascinating article like yours. It is pretty worth enough for me. In my view, if all web owners and bloggers made excellent content material as you did, the net will be a lot more useful than ever before.|

Wow that was odd. I just wrote an exceptionally long comment but right after I clicked submit my comment didn’t seem. Grrrr… effectively I’m not writing all that more than again. Anyways, just wanted to say superb weblog!

Hello mates, good paragraph and nice arguments commented at this place, I am actually enjoying by these.|

I really like reading through a post that can make men and women think. Also, many thanks for allowing me to comment!|

Hello, after reading this remarkable post i am as well happy to share my familiarity here with colleagues.|

I do consider all of the ideas you’ve introduced for your post. They’re very convincing and will certainly work. Nonetheless, the posts are very brief for beginners. May you please extend them a little from subsequent time? Thank you for the post.|

whoah this blog is great i love studying your posts. Stay up the great work! You already know, many individuals are searching around for this info, you can aid them greatly. |

Do you mind if I quote a couple of your articles as long as I provide credit and sources back to your weblog? My blog is in the exact same area of interest as yours and my visitors would really benefit from a lot of the information you present here. Please let me know if this okay with you. Thank you!|