Weak Euro Spells Trouble for U.S., China

Weak Euro Spells Trouble for U.S., China

BRUSSELS -- With the euro plunging and budgets across the continent tightening, European Union member states are betting on an export-driven recovery from recession and the current debt crisis. A cheaper euro has allowed the eurozone export sector to regain competitiveness, as the common currency has fallen against the dollar from $1.50 to a four-year low of $1.20. At the same time, the eurozone's external trade surplus showed a year-on-year increase in March, growing from €1.6 billion in 2009 to €4.5 billion this year. Year-on-year industrial production also grew by €9.5 billion from April 2009 to April 2010.

The euro's fall has been triggered by fears over the common currency's long-term sustainability in the face of current government debt levels, as well as by lack of market confidence in Europe's recovery. Reports of a European economy facing years of chronic unemployment and nearly stagnant growth have helped feed the gloom, as have rumors that Arab, Russian and Chinese governments are reviewing their euro holdings. Even European funds are looking to safeguard their investments elsewhere.

The EU's biggest external trade partners are the U.S. and China, accounting for 31.8 percent and 15 percent of the Union's exports respectively, and the euro's slump is already causing tensions between the three. The U.S. administration has been trying for years to convince Chinese authorities to raise the value of the yuan in order to boost exports to China and make Chinese products less competitive on the global market. Now, a lower euro is undermining the U.S. case, as European exports to China have increased by 47 percent in the last year, making Chinese authorities even more wary of relaxing its yuan peg against the dollar.

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