"Currency war" rhetoric obscures the real need for realignment


Global economy remains so imbalanced that significant currency shifts are needed, not only to help pull the West out of its slump but to ensure a stable and viable world for us all.

John Mills
14 March 2013

Image: Vladimir Guculak

There is much talk of currency wars at the moment. These involve predatory devaluations at the expense of other economies. Clearly, any one country’s depreciation has to be matched exactly by currency appreciations somewhere else. Japan, for example, has recently seen the yen falling by some 15%, with a corresponding improvement in its export performance coming through as a result, inevitably at the expense of its competitors.

At the recent G7 meeting in Moscow, the British Chancellor of the Exchequer agreed with his colleagues that completive devaluations should be strongly discouraged, to avoid so called currency wars. Is this, however, a reasonable - or fair - policy for the UK to pursue?

Finding the correct answer to this question surely has to start by considering whether the existing pattern of exchange rates between the countries making up the world trading environment is in reasonable balance. The test for determining whether this condition is met has to be whether all the economies involved in world trade have exchange rates which allow each of them to grow reasonably rapidly with full employment and without balance of payments problems.

Unfortunately, it is manifestly clear that this condition is a very long way from being fulfilled. In particular, most countries in the West are barely growing at all, have large pools of unemployed or underemployed labour and are struggling with balance of payments deficits. In these circumstances, exchange rate adjustments very clearly are required, to bring the world economy closer to being in balance. Broadly speaking, the currency parities in most of the West need to be reduced substantially – probably by about one third on average – in relation to most of those along the Pacific rim.

For a country like the UK to say that exchange rate changes should therefore be avoided, on the grounds of the disruption which “currency wars” always entail, is madness. If the biggest single reason for the poor state of the UK economy is that our exports are grossly uncompetitive in world markets – which unquestionably they are – then ruling out exchange rate changes which would give us the chance to get sterling down to where it needs to be makes no sense at all. On the contrary, what we ought to be doing is pressing for the currency realignments which the West desperately needs and which would also be in the interests of the world as a whole.

There are several reasons why such a realignment would benefit everyone and not just those of the countries which would finish up with lower parities in a rationally run world. These are:

Avoiding austerity in the West - There is no way in which most of the West’s economies – including the UK’s – are going to avoid years of austerity, little or no growth, high unemployment, stagnant living standards, rising inequality and relative if not absolute decline, unless their economies are allowed to be more competitive. The danger to the rest of the world is that collapsing economic performance in the West would precipitate a major economic crisis involving everyone.

Avoiding debt crises - Chronic balance of payments deficits have to be matched pound for pound, dollar for dollar and euro for euro by corresponding capital movements, mostly borrowing. It makes no sense for anyone for huge debts to be run up which debtors will never be able to pay back and which creditors will therefore eventually have to write off.

Increasing living standards - A vital condition for world output being increased is that there is sustainable demand for all the goods and services which the world economy is capable of producing. This condition – essential for improving living standards and avoiding unemployment – can only be realised if the world economy is sufficiently in balance for increased demand to be capable of producing more output across the world, and not just more balance of payments crises among the weakest and least competitive economies.

Producing a sustainable future - The biggest long term threat to the world is over-population and this is most likely to be the outcome if the world continues to have billions of its people at living standards which are so low that having large numbers of children is the only potential route to security in old age. Bringing up living standards in poor countries is much more likely to happen if the world economy is prosperous than if much of it – especially most of the West - is mired in depression.

How likely is it that the currency realignments which the world so urgently needs will be secured? It will not be easy, but steps along the way may be the following:

Pillorying balance of payments surpluses - Because all balance of payments surpluses have to be matched by deficits somewhere else, we should not admire countries which run surpluses but pillory them much more than we do at the moment for being the cause of many of the world’s problems. These are the economies which need to be forced to revalue their currencies, if necessary by devaluations elsewhere. Running a surplus is not a sign of virtue. On the contrary it is both irrational in itself and hugely damaging for the rest of the world.

Recognising reality in the West - Countries in the West which are in deficit and need lower parities, need to realise what their root problem is and to stop pretending that their future is sustainable without significant currency realignments to make them more competitive. The economic policies pursued in much of the West, particularly the obsession with trying to keep inflation at very low levels rather than targeting exchange rates which keep the economy able to compete in the world, have to change.

Realising the key role of manufacturing - Part of what needs to be done is to increase recognition of the fact that all advanced and diversified economies depend much more or on manufactured goods than services for their export revenues. Having a cost base which enables their manufactured exports to compete in the world – which is almost entirely and exchange rate issue – is thus crucial to rebalancing the world economy.

Finding consensus - Perhaps more than anything else, we need to fight for a consensus around seeking ways to run the world economy more rationally. If there are ways of doing this which are in everyone’s interest, it does not seem an impossible task to achieve this goal even if these involve significant currency parity realignments.

Where, then, does this leave the G7 meeting condemning “Currency Wars? Just putting another nail into the coffin of economic failure in the West, ensuring that the world economy will remain unbalanced, that unsustainable debt will increase, and that – apart from anything else -  the world population will peak or plateau at a much higher level than is necessary: exactly the opposite to the outcome we need.

John Mills is a donor to openDemocracy.


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