Merz's China 'Plaza Accord': A Currency Gambit Doomed to Fail

German Chancellor Friedrich Merz has proposed that the European Union pursue a "Plaza Accord for China" — a coordinated effort to force a significant revaluation of the renminbi — as its primary response to the flood of Chinese exports into European markets. The idea is both strategically misguided and practically unachievable. Even if it could somehow be imposed, it would do nothing to restore European industrial competitiveness. Europe's economic decline is largely self-inflicted, and no currency deal with Beijing will fix it.

At a recent European summit, Merz argued that the renminbi is undervalued by as much as 30%, that China maintains an unfree exchange rate, and that Beijing sustains excess manufacturing capacity through unfair subsidies. His proposed remedy is for the EU to replicate the logic of the 1985 Plaza Accord — the agreement brokered by the United States at New York's Plaza Hotel, under which G7 nations collectively pressured Japan to allow a dramatic appreciation of the yen. Within three years, the yen rose more than 50%, inflating a speculative bubble whose eventual collapse condemned Japan to what became known as the "Lost Decades."

In plain terms, Merz wants the EU to compel a sharp rise in the renminbi to neutralize what he sees as China's export advantage. The context is real enough: after the escalation of the U.S.-China trade war, Chinese exporters aggressively redirected their output toward European markets. Electric vehicles, solar panels, air conditioners, and a range of consumer electronics have poured in. Despite EU countervailing tariffs on some Chinese goods, the trade gap has continued to widen. In 2025, China's goods trade surplus with the EU reached 360.6 billion euros — roughly one billion euros every day.

The core problem with Merz's proposal is that it misdiagnoses Europe's industrial decline. A renminbi appreciation of 20% to 30% would not make European manufacturers more competitive, because the sources of European weakness are almost entirely structural and homegrown.

In 2024, former Italian Prime Minister and European Central Bank President Mario Draghi delivered a landmark report on European competitiveness, commissioned by the EU itself. The Draghi Report identified the continent's industrial ailments as high energy costs, a lagging rate of innovation and commercialization, regulatory rigidity, fragmented capital markets, and dangerous dependency on both the United States and China.

Each of these failures is largely of Europe's own making. After Russia's invasion of Ukraine, Europe — at Washington's urging — abandoned cheap Russian energy in favor of more expensive American supplies, sharply raising industrial production costs. Decades of regulatory accumulation have stifled business efficiency and enterprise. As one pointed summary puts it: the United States innovates, China manufactures, Europe regulates.

The consequences are visible across sectors. In high technology and digital industries, Europe cannot compete with America. In manufacturing, Europe has lost ground not only on cost — where China long held the advantage — but increasingly on quality and innovation as well. The automotive and machine-tool industries illustrate this most clearly. To put it bluntly: measured against the competitive positions of the United States and China in their respective domains, European industry — a handful of exceptions such as ASML aside — has little to show. A stronger renminbi would leave that structural deficit entirely intact.

There is also a deeper historical misreading embedded in the proposal. Currency appreciation cuts both ways. The post-Plaza yen did real damage — but it also conferred real advantages on Japan. A stronger currency gave Japanese corporations the purchasing power to invest and acquire assets abroad on a massive scale; the purchases of Columbia Pictures and Rockefeller Center became emblems of the era. Japanese exports did not collapse. If anything, the pressure of a stronger yen pushed Japanese firms to compete on quality rather than price, sharpening their industrial capabilities. The bubble that eventually formed and burst had its roots primarily in policy errors by the Bank of Japan, not in the exchange rate itself. And in today's globally integrated supply chains, the link between exchange rates and export volumes is far weaker than it was in the 1980s.

The lesson is that a "Plaza Accord for China" might not break China's export machine at all. Unless Beijing responded with serious policy errors of its own, a forced renminbi revaluation could simply enlarge the measured size of China's economy in dollar terms — potentially bringing it closer to, or past, the United States in nominal GDP.

The more fundamental problem is that the EU has no means of compelling China to accept such an arrangement in the first place. The original Plaza Accord worked because Japan was — and remains — a U.S. security dependent. Tokyo had neither the will nor the capacity to refuse Washington's demand. China operates under no such constraint. Beijing does not answer to Brussels, and the worst-case scenario from China's perspective is a trade war with the EU — the outcome of which would be genuinely uncertain.

If Beijing has shown no reluctance to wage a full-scale tariff war against the United States under the Trump administration, the EU — which effectively capitulated in its own earlier confrontations with China — is hardly in a position to dictate terms. Brussels simply does not possess the leverage to bring China to the table on currency. And even the most optimistic reading of what such an accord could deliver does not end in a more competitive European industrial base. （Related： Small Hydropower, Same Old Story: Taiwan Risks Its Rivers Next ｜ Latest ）

Europe's industrial crisis is overwhelmingly a crisis of Europe's own creation. The remedies lie in energy policy, regulatory reform, capital market integration, and the structural recommendations Mario Draghi set out in detail in his 2024 report — a document that deserves far more serious political attention than it has so far received. A currency accord that cannot be negotiated, would not be honored, and would not solve the underlying problem is not a strategy. It is a distraction.https://www.storm.mg/article/11147137https://www.storm.mg/article/11147137​