Browse by Tags

Marketplace 's Paddy Hirsch is back at the Whiteboard . This time he's trying to get us to understand how currency wars affect us all. As usual, he removes the wonk from the discussion. This time using a story of sibling rivalry, honey, and the US-Canada border:

Writing at VoxEU , Simon J Evenett --Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession. But does that make currency wars inevitable? Evenett writes: Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war. Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries. There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war. Read Root causes of currency wars here .

There seemed to be no bright lights for European economies in 2012. But perhaps we were not looking closely enough at what was happening in some of the EU's stronger economies, like Germany. While we were watching Angela Merkel and German citizens struggle with how debt crises in Greece and Spain and Italy would affect everyone in the Euro Zone, German exports, apparently, were doing quite well. From Der Spiegel : In the first 11 months of 2012, exports grew 4.3 percent to €1.018 trillion ($1.335 trillion), the Federal Statistics Office said. Stagnant sales to the rest of the European Union contrasted with a 10.4 percent jump in exports to non-EU nations. Separately, the Federation of German Wholesale, Foreign Trade and Services (BGA) said it expects the value of exports to have reached €1.103 trillion in 2012 as a whole, a four percent rise over 2011, when they exceeded the €1 trillion level for the first time. It also forecast slightly stronger export growth of 5 percent in 2013, to €1.16 trillion. Still, exports weakened at the end of 2012, pulled down by slumping demand in Europe, Germany's biggest market. Some key questions emerge from this report: 1) What does this tell us for the overall global impact of a declining Europe? 2) What role does the weakened value of the euro play in increasing sales of German exports in the U.S., Brazil, China? 3) What might the impact of continuing growth of German exports be on other European economies? Read the full article here .

We understand that what happens in Europe affects economies around the globe, so it is not unusual to see an economist in Asia imploring his regional neighbors to pay attention to the Euro crisis. But Jong-Wha Lee , professor of economics at Korea University and special adviser to the president of South Korea, focuses on a different aspect of the crisis than what Europe's declining purchasing power means for Asian exports. He wants Asian policymakers to focus on the long-term lessons of financial integration in Europe. From Project Syndicate : In fact, East Asian countries are unlikely to move toward a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions. Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating. Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises. Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea. This $120 billion regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency. The ASEAN+3 is now strengthening the CMIM by doubling the total fund size to $240 billion. The group also agreed to enhance the CMIM’s flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s lending program from 80% to 70%. The CMIM has yet to be tested in a crisis. In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner. The $240 billion fund is small, amounting to only about 1.5% of the region’s GDP. European experience suggests that large-scale systemic shocks call for greater financial support. Read Euro Lessons for East Asia here .

Leading German economist Hans-Werner Sinn counts himself among those post-war Europeans who saw a more unified Europe--"the idea of a United States of Europe"--as an ideal step toward lasting stability. But, writing at Project Syndicate , Sinn shares concern that some centralized European institutions, like the European Central Bank, are taking steps that build greater rifts, rather than unity, among member states. Perhaps the idea of a United States of Europe, the dream of post-war children like me, can never be realized. But I am not so sure. After all, deeper European integration and the creation of a single political system offer solid, practical advantages that do not require a common identity or language. These advantages include the right to move freely across borders, the free movement of goods and services, legal certainty for cross-border economic activities, Europe-wide transportation infrastructure, and, not least, common security arrangements. Banking regulation is the most topical area in which collective action makes sense. If banks are regulated at the national level, but do business internationally, national regulatory authorities have a permanent incentive to set lax standards to avoid driving business to other countries and to lure it from them instead. Regulatory competition thus degenerates into a race to the bottom, since the benefits of lax regulation translate into profits at home, while the losses lie with bank creditors around the world. There are many similar examples from the fields of standards, competition policy, and taxation that are applicable here. So, fundamental considerations speak for deeper European integration, extending even to the creation of a single European state. Comments making bodies not only provide services that are useful to everybody, but also may abuse their power to redistribute resources among the participating countries. Even democratic bodies are not immune to this danger. On the contrary, they make it possible for majorities to exploit minorities. To counter this threat, democratic bodies invariably need special rules to protect minorities, such as the requirement of qualified majority voting or unanimous decision-making. Read Europe's Path to Disunity here .

As the global economy evolves, the globe's leading economies become more and more interconnected. Surely this has some impact on global currencies--with a focus on the dollar,yuan, and euro. Last year the World Economic Forum embarked on a study of the international monetary system. This study has resulted in a new report on the uncertainties that exist for global currencies and the potential scenarios for the future. Here is a video that sums up the findings of, and some of the key questions raised in, the report: Read Euro, Dollar, Yuan Uncertainties Scenarios on the Future of the International Monetary System here .

We have seen a lot of speculation over Greece leaving the eurozone. But we are not clear on how a country would go about such an exit. Roger Bootle , of the Biritish financial consultancy firm Capital Economics, has a plan in mind. In fact, he and his colleagues won a tidy sum for their plan, as it won the Wolfson Economics Prize . Bootle explains what he thinks is the best way for an EU state to leave the eurozone--and spark economic growth in the process--to The Economist 's Paul Wallace :