G-20 promises never end currency wars
Recently, the Central Bank of Russia hosted a meeting of the so-called Group of 20’s finance ministers and central bank governors for a joint event to call on nations not to resort to trade protectionism and especially currency devaluations. The international media dubbed the conference as an action to prevent a “currency war.”
At the end of the meeting, all participants expressed their commitment to market-determined exchange rate systems, which means exchange rate flexibility secured not by interventions but by the market mechanism. There were other issues discussed, such as discouraging tax evasion, but it is understood that the main aim of the meeting was to prevent competitive devaluations. The problem is whether the promises given at the end of the meeting were convincing. For example, during the conference, Federal Reserve Chairman Ben Bernanke indicated that the United States had not censured Japan for weakening its currency over the last several months.
As a member of the G-20, what Turkey will do now? Will it keep the promises given at the end of the Moscow meeting, or will it find a way to intervene in the foreign exchange market whenever authorities think intervention is necessary and inevitable? Although there has been considerable improvement in the current account deficit, it is still accepted as one of the most serious problems in the Turkish economy. The origin of the problem is, of course, the foreign trade deficit or, more simply, in spite of all efforts from the government and business, the insufficient pace of exports. To alter this negative trend, new incentives and a “more realistic foreign exchange regime” are being recommended by some politicians, businesspeople and economists.
It means higher rates for higher exports. However, when the import content of exports is examined, it is understood that the positive leverage of higher rates will stay minimal. The real problem is the dependence of exports on imports and the insufficient value added of exportable goods. To increase foreign exchange rates will, of course, create an advantage for exporters, but that cannot bring a lasting solution to the other two problems.
Let’s now turn to discussing the validity of the promises given at the end of the Moscow meeting about not devaluing national currencies to promote exports (and may be to discourage imports, in some cases). However, there are other ways to manipulate exchange rates without deciding to impose devaluations. An ultra-loose monetary policy might easily reduce the value of the national currency.
(Three years ago, the Brazilian finance minister accused the United States of implementing such a monetary policy.) Many G-20 countries will surely try that whenever they think it is necessary to promote exports. And nobody will blame them for not keeping their promises not to devalue their currency. But such a monetary policy is, of course, a hidden devaluation. In the end, if this policy is successful, then the authorities of that country might even be condemned, but they cannot be blamed for not keeping promises.
There is, of course, a risk of an increase in inflation caused by that ultra-loose monetary policy which might spoil the expected effects on foreign exchange rates, but monetary authorities and politicians can accept that risk in order to stimulate their national economies. In short, the G-20’s promises will never end the devaluation debate, as intentions and national interests are nowadays stronger than promises.
One last note: Germans say the euro’s exchange rate is normal and most economists in Europe also say so; however, France’s finance minister has the opposite idea, which may be due to the dismal state of the national economy. Is it possible to decide which view is definitively correct?