Benn Steil


A graphical take on geoeconomic issues, with links to the news and expert commentary.

Greek Drachma: Not an Option

by Tuesday, April 27, 2010

On April 26th, Standard and Poor’s downgraded Greece’s credit rating, and Greek sovereign credit default swaps (CDS) climbed to 825 basis points – far higher than before the IMF and European Council of Ministers announced a support package. The Greek crisis is clearly unresolved. Some have argued that if Greece had never switched from the drachma to the euro it would have been able to pursue a fiscal policy that fit its domestic needs without depending on international capital markets. Yet Greece consistently relied on non-drachma debt issuance well before it adopted the euro in 2001. In the six years before joining the euro, only 27% of Greek debt was issued in drachma. At the end of 2000, just before Greece joined the eurozone, 79% of its outstanding debt was already denominated in euros, and a mere 8% in drachmas. Even if Greece had remained outside the eurozone, its dependence on euro borrowing would only have increased. A falling drachma would merely have brought the current crisis to a head earlier by accelerating the rise in Greece’s debt-to-GDP ratio (think Iceland). The fact that the euro is not an “optimum currency” for Greece, or any other eurozone country for that matter, is not the main problem. That problem is excessive foreign borrowing, a problem with which Greece has struggled since the early 19th century. Read more »

U.S. Goes Low-Tech On China Exports

by Thursday, April 22, 2010

Over the past decade, trade between the United States and China has grown dramatically while also becoming significantly more imbalanced. The United States ran a bilateral trade deficit with China of over $225 billion in 2009, compared with a $69 billion deficit in 1999. One factor contributing to this imbalance is U.S. export controls on certain high-tech products deemed important for national security. As illustrated in the chart above, the United States now exports to China relatively less machinery and relatively more crude materials, such as scrap metal, than it did a decade ago. China’s president Hu Jintao has urged the United States to relax technology export controls for years. The Obama administration is starting to push to do just that, in line with its goal of doubling exports in five years. U.S. Secretary of Defense Robert Gates has bluntly observed that “America’s decades-old, bureaucratically labyrinthine [export control] system does not serve our 21st-century security needs or our economic interest.” Read more »

China Is Not Helping Its Manufacturers

by Thursday, April 15, 2010

Chinese trade officials are reluctant to change China’s dollar-peg currency policy, citing concerns over the fate of exporters. Vice Commerce Minister Zhong Shan has argued that exporters will fail if the currency appreciates because profit margins are often less than 2%. However, when China International Capital Corporation (CICC) performed an analysis evaluating the effect of a hypothetical 5% increase in the value of the RMB against the dollar, by comparing decreases in revenue with the cost savings from cheaper imports, they found that most manufacturing sectors’ profitability actually increased. But as Chen Deming, the Minister of Commerce, has said, ‘we also have our own employment and stability to think about.’ Decreases in revenue suggest reduced employment, which Chinese officials appear unwilling to accept. Maintaining the peg can also, at least temporarily, prop up facilities that would not be profitable at a higher exchange rate. Supporting ventures that are unprofitable at equilibrium exchange rates will not, however, foster economic growth over the long run. Read more »