The Soaring Euro: Imitation is the Sincerest Form of Flattery

American exchange rate policy during the last 40 years has leaned heavily on a simple strategy: unwilling to use US monetary policy to influence the dollar's external value, it has sought to induce other governments to alter their policies. The logic, of course, is simple. All bilateral exchange rates are a function of the interaction between two monetary policies, and thus the exchange rate can be influenced via changes in either policy. During the 1960s and early 1970s, the US pressured (or, as one of my current [German exchange] students put it in class, coerced) Germany to accumulate and hold dollars to shore up the Bretton Woods System. During the 1980s, the US pressured Japan and, to a lesser extent Germany, to realign the mark-yen-dollar triangle. Currently, the US pressures the Chinese to revalue.

The EU seems to be embracing this policy as if they had invented it themselves. Sarkozy, during his recent visit to the States, scolded Congress and demanded the US take steps to stem the dollar's slide or face a trade war. An EU delegation is headed to China to pressure (coerce?) the Chinese to revalue the yuan. All of this on the heels of the ECB's decision that it prefers to keep interest rates steady, thereby refusing to use interest rates to stem the euro's rise.

EU tactics seem a direct consequence of monetary union. Fifteen years ago the French would have screamed at the Germans and then probably devalued the franc. Now, it does no good to scream at the Germans (althought Sarkozy did try that first, I guess old habits die hard), and the French can't devalue. Nor can they directly control ECB monetary policy. The only way to influence the euro's external value, therefore, is to pressure other governments to adjust their policies.

I had always considered American policy a consequence of American structural power and isolationism. The EU's embrace of this strategy makes me wonder if American policy isn't also a product of institutions, especially the independence of the Federal Reserve.