”Currency Wars‘ between the US and China: Where does the EU Stand? Miguel Otero-Iglesias PhD Candidate and Associate Lecturer Department of International Relations, Politics and Sociology O ford Brookes University Gipsy Lane, Headington O ford, OX3 0BP United Kingdom Tel, +../)01213213)33 E-mail, [email protected] Abstract The main o78ective of this paper is to discern where the Eurozone /E;0 stands within the current framework of increased ”currency wars= between the US and China, and whether it is able and willing to change the current International Monetary System /IMS0 to a more coordinated and managed e change rate regime. The answer is that the E; has made certain progress in the latter two faces of monetary power, focused on preference-shaping and agenda-setting, but as yet not in the first face where decision-making takes actually place. France, for instance, has certainly made some efforts, with the support of China, to start the debate on the transformation of the current fle ible-dollar-standard /FDS0. On the back of the ideational effect of European Monetary Union /EMU0 and the internationalisation process of the euro, the Europeans have gained enough leverage to make considerable impact in the second and third faces of power. However, by not being politically united, the E; precludes any possibility to force the US to enter into a compromise and relinquish the e orbitant privilege that the centrality of the dollar offers them. Paper prepared for the conference @The EU, the US and China, Towards the Aew International OrderBC College of Europe, Bruges, Belgium, 22-23 April 2011. 1. Introduction Similarly to the end of the 1960s, when the Bretton Goods system collapsed, and the 1980s, when the twin deficits of the US were also skyrocketing, in recent times /especially after the ”Gall Street Meltdown= in 2008) there is an increasing debate among International Political Economy /IPE0 scholars on whether the hegemony of the dollar in the international monetary system is in doubt /Helleiner I Kirshner 2009; Cohen 2010; Eichengreen 2011). Some of the arguments of the current debate have similar features to earlier disputes on dollar hegemony, while there are now new variables that make this discussion different. Ghere in the past there was Giscard d‘Estaing and Charles de Gaulle complaining about the ”e orbitant privilege= that the US holds by issuing the main international currency, today we have ;hou Xiaochuan /2009), governor of the Chinese central bank, and Hu Jintao, president of China, stating similar criticisms, pointing to the instabilities associated to the Triffin Dilemma1 and proposing, as was the case in the late 1960s with the French /Eichengreen 2008), an increased use of the IMF=s Special Drawing Rights /SDR0. The perceived rise of China as an upcoming world superpower is also comparable with the rise of Japan in the 1980s. China has also developed a successful e port-led growth strategy, based in part on a devalued currency, which is said to be threatening the world‘s number one position of the US economy. Seen from this light, the current debate about the demise of the dollar seems somehow overblown. Calls warning about the arrival of the wolf have been constant, but they have never materialised. As Susan Strange /E2H10 wrote in the late 1980s there seems to be a persistent myth surrounding the potential loss of US hegemony. Aonetheless, there are several important changes in the international monetary system /IMS0 that make the current con8uncture different. Unlike in the 1960s and 1980s, today, with the consolidation of the euro, the dollar faces a tougher competitor than the German mark and the Japanese yen for the top currency spot. Furthermore, the geopolitical global order has also changed dramatically. In the 1960s and 1980s, amid the Cold War, both 1 As Triffin /12600 argued in the 1260s, the dollar standard suffers from one inherent flaw. By being based on a national currency, the issuer of the international currency, in this case the US, needs to run consistently large current account deficits to provide to the rest of the world the necessary liquidity. However, the bloating of these deficits undermines in the long term the credibility of the international currency and threatens with the collapse of the whole system. 2 Gestern Europe and Japan were hugely dependent on the US military for their security. Today, the EU is lees threatened militaryJ hence it has more room to act independently. More importantly, however, is that China is not a US military ally nor is it dependant on the US for its security, rather the opposite /Helleiner I Kirshner 2009). It is developing its own military arsenal and it has legitimate aspirations to be one, if not the hegemonic force in East Asia. Thus, the balance of power in the IMS seems to have changed. The US is not able to coerce or persuade as easily its trade partners to follow its directives. Gith the consolidation of the European Monetary Union /EMU0, the eurozone member states are now better protected /only to a certain e tent, the current sovereign debt crisis has shown the limitations of this protection) from dollar shocks and from US bullying in macroeconomic negotiations. China, on its part, with $2.85 trillion in foreign reserves, is also able to resist better US pressure to revalue the renminbi. It is very unlikely that the Chinese leadership will accept a new Pla:a Accord similar to the one conceded by Japan in 1985. As then, and in the early 1970s, the US needs a weaker dollar to increase e ports and rebalance its economy, and for that it wants China to de-peg from the greenback. China, on the other hand, does not want to repeat the mistakes of Japan /Eichengreen 201E0. Instead of bowing to US pressure, it has maintained the peg and redoubled its efforts in blaming the US government for being the main cause of the global imbalances that led to the global financial crisis. In the view of Chinese policymakers the e treme loose monetary policies of the Federal Reserve /being Muantitative Easing NMEO 8ust the most radical of such policies0 are the most destabilising factor in the current fle ible-dollar-standard /FDS0 regime. These policies have the intention to devalue the dollar and as such can equally be classified as an act of currency manipulation. In this dangerous scenario of ”currency wars=, which can end up in trade protectionism, the positions of the main contenders seem to be opposed. Ghile the US demands a floating renminbi /RMB0, China demands a renegotiation of the status of the dollar as the main international currency and the establishment of a more stable and coordinated international e change rate regime /Chin I Gang 2010). Here China has gained certain allies lately. It counts with the e plicit support of the other BRIC countries, Bra:il, Russia and India, and also with several United Aations /UA0 sponsored e pert groups such as the Stiglit: E pert Commission /UA 2009) and UACTAD /2009J 20100, which have all declared that the 3 current system is unstable and hence a multilateral solution is urgently needed. Most surprisingly, a similar assessment has come recently from the IMF (20100, which until very recently did not dare to question the FDS. Given this state of affairs, the role of the EU, and in particular of the eurozone /E;0, has gained immense importance. By issuing the second most used currency in the world, the E; holds considerable /latent0 influence in the management of the IMS. It is not only that the E; is in a brokering position between the US, as the declining hegemon, and China, the upcoming competitor. Most importantly, the Europeans have 50 years of e perience in dealing with dollar shocks /Marsh 2009). This provides them with considerable leverage when it comes to proposing multilateral solutions to overcome the structural problems inherent to the FDS. Chinese policymakers, for instance, are well aware that if they want to end dollar hegemony they will need to count with European support and e pertise in order to bring US policymakers to the negotiating table. But, the question is how much leverage do the Europeans actually have in reshaping the structure of the IMS in a more multilateral and coordinated fashionB And, most importantly, if they have this leverage, are they willing to use itB These are the two main questions that this paper will address. In order to find answers the ne t section will try to conceptualise how European and Chinese monetary power have advanced in the past decade. By re-e amining Cohen=s /2006a0 monetary power concept, I will argue that the Europeans and the Chinese have gained greater monetary autonomy from the US. I will also claim that the Europeans have been able to e ert certain influence in the third and second faces of power of preference-shaping and agenda-setting /Lukes E21.0. Aot least thanks to closer collaboration with the Chinese. However, the E; is still unable and unwilling to make any significant impact in the first face of power where decisions are actually made. This theoretical analysis will then be supported empirically by presenting evidence collected through a review of the literature and near 30 in-depth, semi- structured elite interviews with policymakers and financial elites in China. The third section focuses upon the ideational effects that the euro has generated among Chinese policymakers and the fourth section analysis the achievements and under- achievements of the E; and China in the second and first faces of international monetary governance.