Opinion: Chris Giles, Economics Editor, Financial Times, Says Countries Are Understandably Tempted to Devalue Their Currency in a Bid to Boost Exports. the Danger, He Says, Is That Nobody Wins

Article excerpt

Is it a foreign exchange reserves fight? Is it a quantitative easing quarrel? Yes, it's the latest instalment of the international currency wars.

First coined in 2010 by Guido Mantega, the Brazilian finance minister, the phrase "currency wars" has no formal definition. Simply stated, however, the danger is that many countries will simultaneously and covertly seek a lower value for their domestic currencies to boost their export industries. Countries on Earth cannot export to Martians, so if one country improves its trading performance, another must be importing more or exporting less. The currency wars threaten destabilising volatility in exchange rates and, ultimately, trade wars and protectionism. That way, everyone would be a loser.


Even though long-term economic success is rarely determined by exchange rate weakness, when growth is almost impossible to find in advanced economies, the short-run incentive to seek currency depreciation is irresistible. Faced with households who have borrowed too much and governments imposing austerity to pull their public finances out of the mire, increasing exports or reducing imports is the obvious route to growth.

The tools are also easy to define. You don't have to manage your exchange rate and foreign exchange reserves like China to make your exports more competitive. Monetary policy, through lower interest rates, can have the same effect. Quantitative easing--the creation of money to pump into an economy through the purchase of assets--is a particularly powerful weapon as it releases money into the hands of the private sector, which will often flow into foreign assets, thereby weakening the currency. Depressing your own currency is much easier than propping up an exchange rate under attack.

It is into this zero-sum game that international diplomacy treads. …