Currency wars and the EU

2015-04-11

 

According to Guido Mantega, the Brazilian Minister for Finance, a global currency war broke out in 2010. Other senior policy makers and journalists suggested the phrase „currency war“ overstated the extent of hostility. With a few exceptions such as Mantega, even commentators who agreed there had been a currency war in 2010 generally concluded that it had fizzled out by mid-2011.

However since September 2014, several journalists, commentators and financial sector insiders have again raised the prospect of further currency war. This time, rather than being intended as a means to boost competitiveness, some states, especially Japan and the Eurozone, may be motivated to devalue their currencies as a means to counter the threat of deflation.

A €60bn per month quantitative easing program was launched in January 2015 by the European Central Bank. While lowering the value of the Euro was not part of the program’s official objectives, there was much speculation that the new Q.E. represents an escalation of currency war, especially from analysts working in the FX markets. David Woo for example, a managing director at Bank of America Merrill Lynch, stated there was a „growing consensus“ among market participants that states are indeed engaging in a stealthy currency war.

Commentators and economists see the Euro going for a downward spiral with the January 2015 plan of the European Central Bank while the Pound stays strong. From an economic point of view after much contemplation and taking into consideration the history of the Euro, specifically in financial crises that occurred in EU countries, the Eurozone would, benefit from putting more weight on deflation risk in its monetary policy. Since Monetary conflicts between major countries are bound to occur in an international monetary system where not all countries can simultaneously depreciate (or appreciate) their currency.

From a political perspective one can see that the actions taken by the European central bank may not have been completely inefficient. Simply because it is possible to reduce the severity of the situation by developing active macro-prudential policies, and by contemplating a high level of coordination between central banks in the event of a crisis, it does not mean that countries should risk threats of deflation and lose not only their economic presence and power but also their political unity specifically within the EU.

Photo: www.economist.com

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