Europe is getting jittery about China’s Yuan. This year, the continent imported more Chinese goods than any other country except the United States. Europe Union’s trade deficit with China is also growing at two times faster than that of US.

This new evidence has reaffirmed politicians and economists’ belief that the Chinese Yuan is greatly under-valuated. No one disputes that. But problems arise when the question comes to how fast the Yuan should appreciate.

The U.S. has been pressing China to appreciate its currency for years. Only recently has the focus of negotiation moved to the pace of change. Now Europe is joining in. But Chinese policy-makers are uncompromising of a moderate approach, citing Japan as a deterrent example.

The currency relationships among the world’s largest trade bodies indicate worse is still ahead, if not action is taken soon. Europe is in the least favorable condition. Euro gained 14% against the dollar and 5% against the Yuan in the past two years, making its products more expensive. As a result, Europe’s trade deficit with China is widening fast, while its trade surplus with the U.S. is closing. The U.S. has a trade deficit with both China and the EU. (See charts )

As a result, the world is seeing the worst account imbalance in history. As American consumers and government keep borrowing, the Chinese government piles up dollars in its foreign reserve – not only cumbersome to manage but creates zero value (when considering inflation, its value decreases). At the same time, with the Yuan under-valued, Chinese consumers still refrain from consumption, and maintain high savings rate.

So, are there middle grounds for the negotiators? Plenty. The Yuan gained over 9% in the past two years, while at one point, the Japanese Yuan was gaining 15% over three months in 1999. Now with EU’s account balance on the line, a stronger Yuan may be just ahead.