Will the Drachma or Renminbi Affect the Dollar?

Global politics and economies — of Greece and China, in particular—– and whether the U.S. economy is likely to be affected by the current turmoil is the topic of an interview with UCSB political economist Benjamin Cohen appearing at the university’s online news site, The Current. In Andrea Estrada’s talk with the professor, Cohen says that Greece’s debt restructuring problems don’t affect the U.S. economy, or even Europe’s, since the country’s gross domestic product is about 2 percent of the total European Union’s.

But the maneuvering underlying the current crisis holds the seeds of potential repercussions. With the International Monetary Fund, European Commission, and European Central Bank breathing down their necks for austerity programs — which increased already significant unemployment and poverty levels — countries like Italy and Spain went through similar debt crises; if Greece goes its own way, those countries’ citizens are going to ask why they’ve had to suffer. “That means Italy; that means Spain; that means Portugal,” Cohen said. “Italy is the third largest economy in the eurozone, and Spain is the fourth. So they become much bigger players and have a much bigger impact on the European economy.” Cohen goes on to explain how the problem would grow to include the U.S.

“Europe is 25 percent of the world economy,” Cohen said. “It is collectively our second-largest trading partner. And if Europe starts to have serious difficulties as a result of a contagion effect, the consequences for the U.S. could be serious.”

Cohen explained that the debt of countries, which has existed since Renaissance times when banks first began, have only been resolved by political negotiation. The stock market losses in China — a drop of 30-40 percent in the past month — are “a much more serious issue,” Cohen said. “China’s stock market is not China’s economy, of course, just like what happens on Wall Street and the New York Stock Exchange doesn’t necessarily reflect what’s going on in the broad U.S. economy. But the stock market decline that has occurred does represent a significant threat to the Chinese economy and that does have implications for the U.S. There aren’t as many steps involved as there are in Europe.”

Though the Chinese government has been trying to prop up its market, it’s had limited success. And economic indicators are not promising; China’s recent years of 10 percent growth seem to have ended. “It’s still a high rate of growth — 6.5 to 7 percent — but for the Chinese economy this is considered a real slowdown,” Cohen said. “And it’s continuing to drop from year to year.” Cohen observed that it’s China’s trading partners who are going to feel the effects, the U.S. among them. “All these places are going to suffer if China’s economy slows down,” said Cohen. “There will be less demand for their exports.” And, he added, it’s likely China will make the renminbi more competitive against the dollar, which is good for consumers but bad for manufacturers. “The real damage to the U.S. economy is coming through the exchange rate as other countries push theirs down in order to promote their imports,” Cohen said. “For consumers, this is great. But if I were working in a textile mill in Georgia, I’d be very upset.”