The World Should Stop Fretting about Currency Wars and Focus on Growth

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OUTLOOK

It'll all be over by Christmas. That's what they said of the First World War. A nave reading of yesterday's G7 statement would lead you to believe that last year's currency wars will have an even briefer duration. "We reaffirm that our fiscal and monetary policies have been - and will remain - oriented towards meeting our respective domestic objectives using domestic instruments and that we will not target exchange rates", the collection of central bankers and finance ministers from the world's biggest economies informed us.

Note the "have been". What this means is that when Sir Mervyn King said last November that sterling's recent appreciation was "not a welcome development" he wasn't targeting the exchange rate. Heaven forbid. That verbal intervention was a response to a damaging and unjustified spike in sterling. This means that when Franois Hollande said this month that "the euro should not fluctuate according to the moods of the markets" he wasn't thinking about a lower exchange rate. Oh goodness no. It was about stabilisation. And so on.

Here's another sentence from yesterday's statement: "We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability." Spot the problem yet? Yes, one country's proportionate response to harmful currency volatility is another country's piratical currency manipulation. Currency wars are in the eye of the beholder. That makes yesterday's statement, ultimately, a gust of hot air.

The Japan omission confirmed it. It's an open secret that Shinzo Abe's government wants a lower yen to boost exports. The strategy was the talk of delgates at the World Economic Forum in Davos last month. But Japan wasn't even mentioned in yesterday's statement.

Currency wars have become a war of plausible deniability. The First World War raged for four agonising years. Expect the covert currency conflict to drag on too.

But does it really matter? For politicians and central bankers to fret about currency wars reflects some disordered priorities. Of course, competitive devaluations are a beggar-thy-neighbour game. And, of course, mercantilist currency manipulation by China - which pushed down interest rates throughout the West to unsustainably low levels - is one reason we're all in this overleveraged mess today.

But the currency swings taking place now are a symptom of the protracted economic weakness across the developed world. Currency movements have mainly been a by-product of quantitative easing schemes designed to boost domestic spending through central bank- asset purchases. Japan's done it. The Federal Reserve has done it. And of course Sir Mervyn and the Monetary Policy Committee have done 375bn of it.

The only major central bank that has refrained from asset purchases is the European Central Bank, and that's because dogmatic German hard-money types go into meltdown at the mere mention of unorthodox measures which - horrors! …