Sunday

17th Feb 2019

Opinion

Where does the US-Chinese turmoil leave Europe?

  • In the past week or two, markets have been struggling with correction globally. (Photo: Guilhem Vellut)

About a week before last Friday, the People’s Bank of China (PBoC) adjusted the exchange-rate of the Chinese yuan against the US dollar to better reflect market conditions. The net effect was a devaluation of 1.9 percent relative to the dollar.

Critics saw the PBoC’s adjustment as still another signal that the slowdown of Chinese growth is worse than anticipated.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

  • Market valuations no longer reflect fundamental economic realities. (Photo: Dan Nguyen @ New York City)

However, that slowdown simply reflects the shift of China’s growth model from investment and exports to consumption and innovation. This shift will take another decade.

Others argued that China’s devaluation was the opening shot in a “currency war” that would spread internationally. In reality, jumpstarting exports and growth tends to require a devaluation of 10-20 percent to be truly meaningful. In that regard, China’s 2 percent devaluation is grossly inadequate.

Still others saw China’s exchange-rate adjustment as an effort to comply with the requirements of the International Monetary Fund (IMF) to include the yuan in the major reserve currency basket.

Indeed, the move toward a more market-determined rate is precisely what the IMF and the US Treasury, along with European financial authorities, have been asking for.

US correction was expected

For some time, Wall Street has anticipated market correction. After all, market valuations no longer reflect fundamental economic realities.

Markets have shrugged off even international signals, including the plunge of energy prices, stagnation in Europe and Japan, growth slowdown in emerging economies, the tumult in the Middle East, and sanctions against Russia.

The simple reality is that US markets have been very expensive. That is reflected by indicators, such as the so-called CAPE (cyclically-adjusted price/earnings ratio). In the US, the historical average has been 15. But before the recent turmoil, that ratio was around 26 in the US – very close to its previous peak before the global recession in 2007.

That valuation might be understandable if it was based on fundamental realities. But it is not. The reason is excessive leverage in the US.

Since 2010, the Eurozone has struggled to cope with its debt burden. That’s not the case in the US.

In the past half a decade, US economy has enjoyed extraordinarily low rates, and rounds of quantitative easing amounting to $4.5 trillion. Meanwhile, US sovereign debt has soared to $18.4 trillion; that’s more than the size of its economy.

Yet, there is no credible, bipartisan plan in the US to resolve the massive debt burden. In effect, if there is no agreement in the next few weeks, Washington could face another government shutdown in October.

Against these odds, US Federal Reserve is expected to begin its first rate hikes in the fall. Many observers consider that risky to ordinary Americans, emerging economies and global growth prospects.

While US unemployment rate has declined to 5.3 percent, long-term unemployment is today higher than in decades.

What’s worse, the Fed’s own target for rate hikes is 2 percent inflation. Yet, inflation in the US is not likely to exceed 0.1-1 percent in the fall.

Europe’s vulnerabilities

While European economies have been impacted adversely by recent Chinese volatility, the turmoil in the region’s markets began with the global crisis in 2008, has deepened with the debt crisis since 2010 and been recently fuelled by political divisions over the third Greek bailout.

While Europe suffers from structural challenges, the region is enjoying a mild cyclical recovery, thanks to the European Central Bank’s quantitative easing and low interest rates, a significantly weaker euro, record-low oil prices and greater restraint from EU authorities.

The challenge is that the current rebound relies excessively on growth in Germany and Spain. While economic prospects look mildly better in France and Italy, their growth rates are not likely to reach the pre-crisis levels anytime soon.

Moreover, the political environment is in flux and anti-system protest parties continue to gain momentum.

In the past week or two, markets have been struggling with correction globally. The plunge stopped only after Beijing cut interest rates for the fifth time in nine months along with reserve-ratios. As a result, US and global markets rallied initially, while unease prevails in Chinese markets.

Europe is in no way immune to market turmoil. Unlike the Chinese yuan, the euro plunged some 15 percent against the dollar in just a year. If the US Fed will start rate hikes prematurely, markets will quickly sink again and the Fed must begin rate cuts anew.

The adverse consequences would be global and substantial in Europe, due to the region’s broad and deep trade, investment and financial ties with the US.

Today, the challenge for the world economy is the absence of adequate cushions against economic contractions and market falls.

Dan Steinbock is research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore)

Could Finnish presidency fix labour-chain abuse?

There can be no more excuses for business. They will be held for responsible for their failure to take action to prevent the risk of human and labour rights through their supply chains.

Brexit vs Grexit: The six stages of losing to the EU

Theresa May's venture seems very similar to the attempt by Alexis Tsipras in 2015 to persuade Brussels to accept his terms for the bail out - a huge negotiation failure, presented to the public as the best possible deal.

Why Brussels' toxic lobbying culture must end

What is revelatory about the study by Corporate Europe Observatory is the sheer number of embassies, committees and advisory groups that lobbyists can target: from the Council all the way down to standing committee on plants, animals, food and feed.

News in Brief

  1. Spain's Sanchez calls snap election on 28 April
  2. 15,000 Belgian school kids march against climate change
  3. May suffers fresh Brexit defeat in parliament
  4. Warning for British banks over Brexit staff relocation
  5. Former Italian PM wants Merkel for top EU post
  6. Antisemitic incidents up 10% in Germany
  7. Italy's asylum rejection rate at record high
  8. Hungary will not claim EU funds for fraudulent project

What does Poland want from the EU?

We propose several changes to the EU, derived from the political philosophy behind the current Polish government, and what Poles expect from the EU - this could be seen as a manifesto Poland wants the next European Commission to tackle.

Migration and May elections - time to get facts right

If misinformation in the field of migration can bring a government down, as in the recent case of Belgium following the country's adoption of the UN migration pact, then it can doubtless produce a populist majority in the European parliament.

Stakeholders' Highlights

  1. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership
  2. Intercultural Dialogue PlatformRoundtable: Muslim Heresy and the Politics of Human Rights, Dr. Matthew J. Nelson
  3. Platform for Peace and JusticeTurkey suffering from the lack of the rule of law
  4. UNESDASoft Drinks Europe welcomes Tim Brett as its new president
  5. Nordic Council of MinistersNordic ministers take the lead in combatting climate change
  6. Counter BalanceEuropean Parliament takes incoherent steps on climate in future EU investments
  7. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  8. Nordic Council of MinistersSeminar on disability and user involvement
  9. Nordic Council of MinistersInternational appetite for Nordic food policies
  10. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  11. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups
  12. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”

Latest News

  1. Sluggish procedure against Hungary back on table
  2. Could Finnish presidency fix labour-chain abuse?
  3. Brexit and trip to Egypt for Arab League This WEEK
  4. Belgian spy scandal puts EU and Nato at risk
  5. EU Parliament demands Saudi lobby transparency
  6. Saudi Arabia, but not Russia, on EU 'dirty money' list
  7. EU agrees draft copyright reform, riling tech giants
  8. Rutte warns EU to embrace 'Realpolitik' foreign policy

Stakeholders' Highlights

  1. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  2. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  3. Nordic Council of MinistersState of the Nordic Region presented in Brussels
  4. Nordic Council of MinistersThe vital bioeconomy. New issue of “Sustainable Growth the Nordic Way” out now
  5. Nordic Council of MinistersThe Nordic gender effect goes international
  6. Nordic Council of MinistersPaula Lehtomaki from Finland elected as the Council's first female Secretary General
  7. Nordic Council of MinistersNordic design sets the stage at COP24, running a competition for sustainable chairs
  8. Counter BalanceIn Kenya, a motorway funded by the European Investment Bank runs over roadside dwellers
  9. ACCACompany Law Package: Making the Best of Digital and Cross Border Mobility,
  10. International Partnership for Human RightsCivil Society Worried About Shortcomings in EU-Kyrgyzstan Human Rights Dialogue
  11. UNESDAThe European Soft Drinks Industry Supports over 1.7 Million Jobs
  12. Mission of China to the EUJointly Building Belt and Road Initiative Leads to a Better Future for All

Join EUobserver

Support quality EU news

Join us