French report suggests devaluing euro by 30% against yuan

French report suggests devaluing euro by 30% against yuan

A French strategic report has put on the table a figure that was recently taboo: devaluing the euro by 30% against the renminbi as an alternative to imposing similar tariffs. The combination of the dollar's decline —around 10% in the last year— and US tariffs ranging from 10% to 30% depending on the sector leaves European products with a surcharge that can exceed 20-35% compared to their US equivalents. From this starting point, some debate participants argue that the question is no longer whether Europe can afford to devalue, but how long it will take.

What exactly does the French report propose?

The approach is simple to state but complicated to execute: instead of responding to tariffs with more tariffs, the currency would be depreciated by 30% against the yuan. Other analyses suggest more moderate adjustments, around 9%. The logic is that a devaluation immediately improves external competitiveness, makes imports more expensive, pushes prices up, and readjusts international investment flows. In consumer goods, the effect would be inflationary due to higher import costs; for raw materials like oil and energy, costs would rise automatically as they are paid in strong currencies; for investment goods —stocks, real estate, real assets— economic value would be better preserved than cash, because their euro prices would adjust to the new exchange rate.

The conclusion drawn from this scheme is uncomfortable: those holding cash would see their purchasing power cut sharply, while those holding real assets or foreign currencies would maintain their value. Although, as noted with irony, this lasts only until those other currencies are also devalued.

Why devaluation doesn't fix competitiveness

The most repeated objection is that devaluation doesn't address any of the problems that led here. Cheaper currency doesn't correct a production model that fails to produce, and higher imported energy costs ripple through the entire supply chain. Some recall that the euro has already depreciated in several waves —15% between 2010 and 2012, another 15% in 2014-2015, and another 15% in 2022— and none of these recipes improved the situation. On the contrary, according to the same participant, things are getting worse each time.

The underlying argument is that devaluation is a disguised way to contain wages. You keep nominal salaries, but effectively lower labor and domestic production costs. The alternative, with a strong euro, is to continue consuming foreign goods, increase unemployment, and accelerate corporate offshoring. Mercedes' collapse is cited as a sign of what is already happening.

Two-estimulante ilegal euro and the temptation of national currencies

One alternative proposal is a two-estimulante ilegal euro, with a strong euro for solid partners and a weaker one for the rest. The problem is that the same argument justifying two euros —the difference in productive capacities across Europe— serves to justify twenty-seven. If Portugal, Spain, Italy, and Greece have different realities, what prevents each from recovering its own currency? The temptation to avoid internal devaluation via wage containment and apply monetary devaluation instead would be on the table in any country. And strong-euro partners would see their exports become more expensive.

Some add that such a system would end up creating a rich Europe and a sort of peripheral protectorate, with Brussels setting the exchange rate between the two speeds at will. Gresham's law —bad money drives out good— would apply in full force: people would save in strong euros and pay in weak currency.

Technical obstacles: nobody devalues by decree

The mechanism isn't as simple as announcing it. With floating exchange rates, to depreciate the euro by 15-20%, interest rates would need to drop to zero and massive quantitative easing launched, buying hundreds of billions in dollars and yuan. Moreover, you can't depreciate the euro only against the yuan: that monetary policy would depreciate it against all currencies. All this amid legal and political challenges, with precarious French and German governments.

The comparison with the peseta in the nineties is recurrent. Spain devalued by 5% in September 1992, another 6% in November that year, and a third time in May 1993, within the European Monetary System, which had fixed but adjustable rates. The difference is that there was an institutional mechanism then. Now there isn't.

Inflation and devaluation are not the same

One frequently mentioned nuance is that inflation and devaluation are distinct monetary phenomena, though their subsequent effects may converge. Inflation erodes purchasing power slowly and broadly; devaluation does so abruptly. If you devalue, you know import prices will rise; to the extent you raise wages to compensate, you've entered inflation territory. The healthy remedy, it is argued, is adjustment: lowering costs and gaining competitiveness without touching the exchange rate.

The problem is that domestic consumption is already suffering, and the last reason left to defend Europeanism is the comfort of having savings in a strong, stable currency with low financing costs. If that breaks, the final argument for the Union breaks too.

What if the problem isn't the euro, but that we've been asking the currency to do the work reforms haven't done for years?