Why should you care about currency wars?

Leaders from the G20 major economies are heading for the South Korean capital Seoul for their fifth summit. But have they run out of steam?

They certainly have some important and difficult issues to tackle. Arguments about currencies and the related question of international trade imbalances have generated a lot of heated debate in the run-up to the summit. And they will be difficult to resolve.

The central issue in what has been called a currency war is currencies either being driven down or prevented from rising to maintain or improve a country’s competitiveness.

The US has a central role on both sides of the argument as accused and accuser.

The US Federal Reserve has been widely blamed for driving the dollar down with policies that force down interest rates and increase the US money supply.

The effect has been to encourage investors to seek better returns outside the US, and by selling dollars to buy foreign assets, they lower the value of the US currency.

US proposal

At the same time, the US have kept up the long standing criticism of China for maintaining its Yuan at a level that they, American officials, think is artificially low and unfairly competitive.

Ahead of the summit, the US came up with a concrete proposal – quantitative limits for current account imbalances – the current account being made up of trade in goods and services plus some financial flows.

To achieve that, China would have to allow its currency to rise, exactly as the US wants.

But there is little chance of that being accepted at the summit.

There is too much opposition, from China and others too.

That is not to say this summit will not achieve anything.

There will almost certainly be an official endorsement of new rules for banks, already agreed by regulators, to make them better able to withstand storms.

It is another, and controversial, matter whether the new rules are up to that task.

Earlier action

Nonetheless, there is a view that the G20 summits have lost momentum.

Certainly, in the early stages – the first summit was in Washington in November 2008 – the gravity of the global economic situation helped to focus minds. It was still pretty scary by the time of the second one, in London’s Docklands in April last year.

Language such as “on the brink”, “the abyss”, “another depression” was widely used at the time, and some big decisions were taken quickly.

They agreed to triple the resources available to the International Monetary Fund for rescue loans.

There was also more or less coordinated economic stimulus from government spending and tax cuts.

Whether that works is controversial, but many economists think it helped prevent things turning out even worse.

Morris Goldstein of the Peterson Institute of International Economics in Washington says that without G20 coordination there would probably have been less stimulus.

He says that if a country acts alone, some of the extra spending “leaks out in terms of imports”.

He argues that G20 cooperation also helped make the effort to fix the banks more effective.

Overall, “in terms of crisis management, I give them pretty high marks”, Dr Goldstein says.

More recently, he says, the record has been much more modest.

Alistair Darling, the former UK Chancellor of the Exchequer also says that momentum of the early summits has gone, though it has to be said those early summits were the ones he was involved in.

Still, it does seem that, now the global economy has stepped back from the brink, progress is slower, and world leaders in less of a hurry to do deals.

Given the uneven nature of the recovery, and the tensions in the currency markets, it would be too much to say we are back to business as usual.

But it is certainly a lot less unusual than it was when the G20 summits got started.

 

Source: http://www.bbc.co.uk/news/business-11725352