Devaluation and discord as the world’s currencies quietly go to war
February 5, 2015 | 12:00 am| | | Start Conversation
There is every sign that the European Central Bank’s €1.1 trillion stimulus package is going to unleash a long period of beggar-thy-neighbour currency wars. Maybe not quite in the way that wrecked the global economy in the 1930s – triggering retaliatory trade tariffs and sending industrial production spiralling downwards. But enough to dampen the enthusiasm of exporting companies which might be thinking of expanding output.
This is a war that pits the central banks of the world’s major trading blocs against each other and, as currencies yo-yo in value, creates a nervousness and caution among investors that can create years of stagnation.
Two economists who warned of a looming credit crunch in 2007 are now warning about the onset of competitive devaluations driven by central bank policies. Before Davos, William White, a senior OECD official and a former chief economist to the Bank for International Settlements (BIS), told the Daily Telegraph: “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.”
In the Guardian before Christmas, Nouriel Roubini, the economist known as Dr Doom for his prescient predictions of calamity, warned that while it was possible for one or two small nations to quietly devalue, a look around the world revealed almost every country devaluing against the dollar and each other.
The euro has fallen almost 20% against the dollar over the past seven months and is destined to take another dive following the announcement last Thursday of the ECB’s QE scheme. Who knows, the euro could be below $1 in a few months’ time. Last year it was worth almost $1.40.
ECB president Mario Draghi says the value of the euro is not an official target. Yet he has talked at previous meetings about his concern that the currency is out of step with the poorly performing eurozone economy. He hoped currency traders would do his work for him. In the end he has been forced to print money, and lots of it, to drive down the euro’s value.
Arguably Draghi is only reacting to the US and UK, which printed money to devalue the dollar and sterling immediately after the Lehman collapse, and the Japanese, who have halved the cost of their exports to the US in the last year by doing the same.
In November, Japan’s central bank cranked up the printing presses further, saying it planned to increase QE asset purchases to $700bn a year.
Ask Tokyo officials about the policy and they will say it is legitimate as a short-term fix while deeper structural reforms are pushed through. How long is the short term? Prime minister Shinzo Abe won’t say. Meanwhile, there are plenty of academics in Japan and elsewhere who argue it is impossible for a high-wage nation like Japan, struggling against low-cost competitors, to ever go back to a high yen.
There is a growing feeling that the UK is in the same position. British holidaymakers will benefit hugely from the falling euro, but exports are going to be hit hard. John Mills, the businessman and Labour donor, will argue in a book published later in the spring that sterling should be nearer parity with the dollar and not the current $1.50. He says manufacturers cannot be expected to expand production in any meaningful way until the currency falls.
Will the Americans find their recovery faltering under pressure from a high dollar? In response, Congress might put pressure on the president to impose tariffs on artificially low-cost imports. Anger at China over its policy of depreciation might spill over into disputes with Japan and Europe for the same reason. And the US Federal Reserve chief, Janet Yellen, could come under pressure to block a planned increase in interest rates to halt the dollar’s rise. If she does, global currency wars will be in full flow.
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