Eurozone Finance Ministers call for revaluation of China's yaun/renminbi; Radical proposals to improve Transparency in Financial Markets discussed

European
Eurozone Finance Ministers call for revaluation of China's yaun/renminbi; Radical proposals to improve Transparency in Financial Markets discussed
By Finfacts Team
Oct 9, 2007, 05:18

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European Commission's Quarterly Report on Eurozone - published October 04, 2007.

Eurozone Finance Ministers met in Luxembourg on Monday evening and called for "adjustments" on global currency markets, saying the weakness of the Chinese yuan/renminbi, US dollar and Japanese yen were principally to blame for the recent surge in the value of the euro.

"We reaffirm that exchange rates should reflect economic fundamentals and that excess volatility and disorderly movements in exchange rates are undesirable for economic growth," the Ministers said in a statement at the end of the Eurogroup meeting.

While Ministers noted "with great attention" that US authorities had reaffirmed "that a strong dollar is in the interest of the US economy," they pointed in particular to the Chinese yuan/renminbi (Yuan - Mandarin for unit; Renminbi - Mandarin for People's Currency) as the biggest culprit.

"In emerging economies with large and growing current-account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur," the statement said.

Luxembourg Prime Minister Jean-Claude Juncker, the chair of the Eurogroup, said that EU officials planned to make their case for an undervalued yuan during a visit to China "before the end of this year."

Proposals to Improve Transparency in Financial Markets

The Finance Ministers discussed draft radical proposals to improve transparency in financial markets and to change the way credit rating agencies operate in an effort to avoid another credit crunch arising from complicated financial products where risk is difficult to assess.

The proposals include a close examination of the role of credit rating agencies, particularly in relation to structured finance instruments, conflicts of interest, transparency of rating methods and delays in reassessing ratings.

The move comes ahead of the Group of Seven (G7) leading nations meeting in Washington DC.

The FT says today that the most radical step being considered by the G7 would be to force rating agencies to split their rating business from their consulting activities, a person close to the G7 told FT Deutschland, the Financial Times’ sister paper. This was intended to prevent any potential conflicts of interest.

Other options include forcing agencies to provide ratings not only for creditworthiness but also for liquidity risks and limiting the use that public institutions such as central banks or governments make of ratings.

Good news from the real economy

European Commissioner for Economic and Monetary Affairs Joaquín Almunia said that the Eurozone economy is enjoying "a good recovery" despite the continuing market turbulence.

"I think the economy is in a good recovery even with the turmoil in financial markets", Almunia remarked to reporters as he entered Monday's meeting.

"We are receiving good news from the real economy," he said.

Almunia said in a quarterly report, published last week, with an update of the economic outlook in the Eurozone and the EU 27, that while economic activity is still strong in the Eurozone, downside risks to the growth outlook have risen as a result of market turmoil and the threat of a sharp slowdown in the US.

The report said that the European economy will grow by 2.8% this year - slightly less than projected in the spring. This is mainly explained by a weaker-than-expected outcome in the second quarter, while the recent turmoil in the financial markets clearly increased the risk to this outlook.

Based on an update for the seven largest Member States in the European Union, the Commission forecasts economic growth in 2007 at 2.8% in the EU and 2.5% in the Eurozone. This is only 0.1 percentage point (pp) less than in its spring forecast, as European growth remains supported by sound fundamentals and a still favourable global environment.

"The sound economic fundamentals of the European economy will help weather the current financial turmoil. But the increased risks to the outlook require governments to hold steady to the reform and budgetary consolidation agenda", Almunia said.

During the summer, turmoil in the financial markets hit the global economy. This turbulence, which originated from problems in the US sub-prime mortgage market, has caused a disorderly re-pricing of risks in global asset markets. But since both the global and European economies were generally sound ahead of the turbulence, they ought to be in a relatively good position to weather it, the Commission says.

Economic growth rates for the seven largest Member States in the European Union have been revised as follows: Germany will grow by 2.4% this year (against 2.5% projected in the spring forecast), Spain 3.7 percent (3.7), France 1.9 percent (2.4), Italy 1.9 (1.9), Netherlands 2.5 (2.8), Poland 6.5 (6.1) and the United Kingdom 2.9 (2.8).