Currency War and the UK
The Economist leads today with the developing “currency war”.
Adam Lent, of the TUC, has asked if this might not end up over shadowing the coming austerity.
It should also leave us wondering whether the biggest political debate of coming months and years might not be austerity (or at least, not austerity alone) but how the UK should react to a round of competitive devaluations and, more widely, how it should respond to the rise of China. It might be wise for Labour to start considering its response now.
I agree Adam is right to speculate. This certainly feels bad.
One lesson of the Great Depression, according to Ben Bernanke, is that countries that devalued early returned to grow quicker. The vogue for export-led growth might tempt many countries into pursuing this policy.
The international co-operation that Gordon Brown cobbled together in March 2009 is breaking down with the G20 split on the question of stimulus and split on the question of exchange rates.
A global solution to the unbalanced world economy looks unlikely as countries put their domestic constituencies first.
Flash points at the moment are the US trade deficit (especially in the face of high domestic unemployment), the notion of QE 2 (which to many in the East looks like devaluation by other means), the spat between Korea and Japan over intervention and of course the level of the Chinese renmimbi.
Over the past few weeks there has been currency intervention, or talk of it, in China, Japan, Korea, Brazil, Taiwan, Russian, the Eurozone, Switzerland and India (by my count).
A race to the bottom will help no one.
But being parochial – what are the implications for the UK?
Clearly these developments make the hopes of an export-led recovery more forlorn. Increased currency uncertainty may also hamper the freedom of monetary policy – George Osborne’s only “plan B” if the economy heads South.
Does the coalition have a currency policy? How long will the line that “Sterling is freely floating and its level set by the market” hold if governments ramp up intervention?
We haven’t, in the UK, really had a currency policy since 1992, when Cameron was but a young Spad in the Treasury. Now might be the time to consider one.