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Currency Dispute Overshadows EU-China Summit

EC President Jose Manuel Barroso (right) with Chinese Prime Minister Wen Jiabao at the EU-China Summit in Brussels
BRUSSELS -- With suspicions running high in Brussels that the Chinese delegation avoided a face-off with a potentially hostile press corps by citing time pressures, it was left to the EU leaders to sum up the results of the day.

The president of the European Council, Herman van Rompuy, and the president of the European Commission, Jose Manuel Barroso appeared caught out. They were reduced to issuing joint "written remarks" long after the close of the summit.

The statement says the main EU concerns are improvement of business opportunities for EU companies, adjustments in exchange rates, and the reform of global financial institutions as main EU concerns.

The EU leaders also called for "further progress" in the fields of the rule of law and human rights, "which for us remains an important element of the dialogue with China."

By most accounts, tensions over currency exchange rates dominated today's talks.

And here, the European Union is facing a Chinese paradox.

On one hand, Beijing's robust economic performance has been a key factor in turning around the global economic crisis -- something repeatedly noted by top EU financial officials in the run-up to the EU-China summit.

Yet, the same officials also complain that China's growth comes largely at the expense of its European -- and U.S. -- competitors, thanks to the relative cheapness of its state-regulated national currency, the renminbi, also known as the yuan.

On October 5, Luxembourg Prime Minister Jean-Claude Juncker -- the informal leader of a club comprising the 16 EU countries that have adopted the euro -- effectively asked China to allow its currency to appreciate and sacrifice some growth in the interests of global economic stability.

"We think this was not a surprise for our Chinese friends that China's real effective exchange rate remains undervalued and is thus contributing to misalignment in global exchange rate configurations," Juncker said.

What the EU wants is for China to reduce exports and start consuming more of its own products -- in effect, earning less money for them.

Beijing, for its part, argues that its policies are legitimate and designed to enable the traditionally poor country of 1.3 billion people to catch up with the prosperous West.

China's currency policy has long been something of a headache for the United States, as well, which has threatened to hit Chinese exporters with heavy import duties if Beijing does not allow the yuan to appreciate.

The U.S. House of Representatives last month passed a bill allowing tariffs on exports from countries with "fundamentally undervalued currencies," like China. The bill still needs to be passed by the Senate -- far from certain -- and signed by President Barack Obama to become law. China says the bill, if passed into law, would violate world trade rules.

Policymakers in Europe are particularly vexed, as the euro has in recent weeks also risen sharply against the dollar, further hitting EU exports.

France's President Nicolas Sarkozy, who is about to take over the chairmanship of the G20 group of leading economies, recently described the ongoing struggle between major currencies as a "race to the abyss."

European officials, meanwhile, lauded Chinese Prime Minister Wen Jiabao's October 4 announcement that Beijing would continue to buy Greek government bonds when the country resumes selling them, saying that the move would aid Greece's economic recovery.

In an ironic twist, however, that move would also boost confidence in the euro, further strengthening the currency and in the process harming European exports.

Continuing Staus Quo

Meanwhile, there is little observable convergence on other issues on the EU-China agenda.

In addition to the financial talks, a separate "cultural dialogue" is taking place in Brussels co-chaired by Chinese philosophers and renowned Italian writer Umberto Eco. But there are no equivalent human rights talks -- which are relegated to twice-yearly meetings of lower-level officials behind closed doors.

Human rights issues will come up at the summit, EU officials say, although they are unwilling to discuss the bloc's specific demands, avoiding comments on individual cases or on the Tibet issue. The officials did say, however, that China's ratification of the International Convention on Civil and Political Rights is the EU's top priority.

One of the most important benefits of such summits for the EU is sharing the global limelight with the world's biggest powers -- angering China at such a gathering is viewed as counterproductive.

As a result, the bloc is content with the status quo in the relationship with China, with neither side able to make headway on its key priorities.

China, for its part, has been unable to get the EU to recognize it as a full market economy. Beijing has also been unable to persuade Brussels to lift the arms embargo in place since the 1991 massacre of protesters in Tiananmen square.

The EU-China summit was proceeded by the larger EU-Asia summit meeting in Brussels, which brought together around 50 leaders.

The EU will also hold a summit with South Korea, the highlight of which is the signing of an agreement removing import barriers to the country's auto industry.