G20 finance ministers and central bank governors ended their two-day meeting in Moscow on Feb. 16 with a joint communiqué that included a promise that the G20 members would “refrain from competitive devaluation” and “resist all forms of protectionism.”
However, if no resolute action is taken to prevent competitive devaluation, the joint communiqué of G20 financial leaders will degenerate into empty talk.
Currency war risks depend on policy outcomes rather than motives. No country would print lots of money in the name of damaging others’ interests and fighting a currency war. Instead, they would emphasize that their monetary policy is purely aimed at stimulating domestic economic growth, and make efforts to avoid being blamed for possible negative spillovers caused by their policy.
There is no smoke without fire. People’s worries about a currency war are not baseless. After the United States and eurozone announced a new round of quantitative easing with an indefinite timetable, the new Japanese government led by Shinzo Abe followed suit at the beginning of the year, leading to a sharp depreciation of the yen. Bank of England officials also said on Feb. 16 that sterling may need to weaken further.
Certain experts believe that the U.S. dollar and the euro have not experienced competitive devaluation. The United States has launched quantitative easing after the 2008 global financial crisis, but the U.S. dollar has still been regarded as a safe-haven currency and has not depreciated markedly, so technically speaking, there is no currency war. However, theory must be connected to reality, and stressing the exact definition of currency wars cannot dispel people’s worries.
The two currencies have not experienced competitive devaluation probably because the United States and eurozone turned on their money printing machines at carefully selected times in several rounds. It is possible that they will experience competitive devaluation in the future. The United States’ open-ended quantitative easing and repeatedly raised debt ceiling, the eurozone’s commitment to “defend the euro at all costs,” and senior Japanese officials’ hint about continued yen depreciation will “add straws to competitive devaluation” in the next few years.
The Group of Seven (G7) and the Group of Twenty (G20) have both made clear statements against competitive devaluation, showing that the currency issue has become a major threat to the world economy. However, the monetary policies of developed economies have been kidnapped by their financial woes, and Managing Director of the International Monetary Fund Christine Lagarde has had to cool down the debate on currency wars.
The monetary policies of developed economies have a far greater impact on global stock, bond, and bulk commodity markets as well as emerging and developing economies than in the last century. At present, predicting the possibility of a currency war and the straw that broke the camel’s back is not a top priority.
Countries should realize that as people’s worries about currency wars increase, international hot money is taking the chance to make waves, and imported inflationary pressures as well as risks of financial turmoil and asset bubbles are increasing. Market uncertainty and the difficulty of macroeconomic regulation are also on the rise.
Countries issuing reserve currencies should take resolute action to prevent competitive devaluation, and the IMF should also strengthen oversight and regulation of related countries’ fiscal and monetary policies as well as their spillover effects, in order to ease people’s worries about currency wars.
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