Currency Wars

Escrito el 17 febrero 2013 por Mikel Aguirre en Unión Europea

There is an interesting book published in 2011, Currency wars by James Rickards, with a shocking subtitle: “The making of the next global crisis”.  Lat week France president told in the European Parliament: “The Euro should not fluctuate according to the mood of the markets” If this is suppose to express a desire for an exchange rate intervention is yet to be seen but certainly there are two views inside the EU. The one expressed by François Hollande and the one supported by Germany that has long opposed any intervention on this issue affirming that eurozone´s top priority must be “strengthening competitiveness , rather than weakening the currency.

The relevant point delivered by Mr. Hollande is that “A monetary zone must have an exchange rate policy, if not it will be subjected to an exchange rate that does not reflect the real state of the economy”.  The euro area is expected to deliver another weak growth this year: around 0%, but the Euro appreciated during the last 12 months against the USD (0, 76 a year ago vs. 0, 74 this month, and a 4% rise this year).

Currency market is by definition an Over the Counter one, hence not regulated.  Should the ECB factor the strength of the Euro or should it take decisions as had been taken in Japan recently, weakening the exchange rate of the yen?

The world is yet to recover from the 2008 crisis and promote exports had been taken as a first priority politic for many countries worldwide.

In the globalized world we live today the main question for Europe is if this trade promotion policy can be taken without currency intervention.


Currency Wars - Economia enpildoras.com 17 febrero 2013 - 02:07


Katia Villaseca 18 febrero 2013 - 11:42

Los ingresos producidos a partir de las exportaciones de recursoso naturales generan consecuencias positivas en el corto plazo. Pero tienen efectos negativos en el resto de sectores económicos que son más intensivos en mano de obra, tales como servicios y otros sectores industriales. Esto haría peligrar la evolución positiva que ha tenido la tasa de desempleo en dicho país en alrededor de 10% en la actualidad. Esto ya se havenido demostrando con tasas de desempleo de alrededor de 15% en el eje cafetero de Pereira en Colombia, que es intensivo en mano de obra.

Jorge Schnura 18 febrero 2013 - 12:40

I believe Mr. Hollande’s words make little sense. a currency that is intervened will most probably not reflect the true state of the economy but the economy that the government wants to show us. Besides how could something better reflect the market than being part of itself as the currency market is right now? I believe in free economy, with some exception of course, because it is by definition the most efficient way of representing the real valuation of what’s being traded and more and more so with algorithmic trading and HFT.
A currency that is freely traded reflects its value in real time, one that is intervened reflects its value a few months ago.

Rowan 18 febrero 2013 - 14:40

In the case studies we’ve been doing for our Economic Development class we’ve seen many examples of the negative effects of artificial currency valuations. However, we did see that in the case of China, it has benefitted from an artificially low value on the yuan. The undervaluation of the yuan is seen by other countries, especially the U.S., as a “dirty trick” that gives it an unfair advantage in keeping the costs of its exports down. Perhaps the EU, if it wants to compete better in global trade needs to engage in actively keeping the value of the Euro down, especially since it doesn’t have them competitive advantages, such as cheap labour, that other countries have.

Tim Palmer 19 febrero 2013 - 08:03

Last week, the leaders at the G20 Summit rebuffed Mr. Hollande’s plans for the Euro, saying “We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.” For now at least it seems like he is somewhat alone in his calls for exchange rate interventionism. The funny thing is though, that with all of Europe’s problems, the Euro and it’s exchange rate aren’t one of them. Last summer, Reuters came out with an opinion saying how a devaluation of the Euro could actually serve as a blessing in disguise by increasing export competitiveness and possibly helping many of the struggling Eurozone countries in the process. Since economic recovery and stability seem to be the priorities for Europe right now, a free-market currency may be the way to go.

Manuel Bobone 19 febrero 2013 - 13:37

I think in the short-term weakening the currency gives results, but it isn’t efficient in the long-term. We only saw a few examples of countries that did this and had good results (china is an exception). In my opinion interfering with the currency value is not the solution to a real and stable growth of exports, but rather improving the quality of the services and the necessary infra-structures for such development. Thus, interfering with the value of the euro would be an inefficient policy and the value of the euro wouldn’t reflect the real state of the economy.

Virginia Bencivenga 19 febrero 2013 - 18:33

Promoting exports may have a positive impact in the short run and generate enough income. However some not so positive effects may occur on sectors such as services and other industrial sectors. Mr Hollande is right in stating that a monetary zone must have an exchange rate policy, and it is important too look into what he said about the exchange rate not reflecting on the real state of the economy. Having a real exchange rate may also have a positive effect on unemployment especially nowadays where the world in general is still recovering from the 2008 crisis.

Xuyang Ma 20 febrero 2013 - 01:04

The stability of the union itself is the most important issue for the EU; once the euro fails, the EU would be in a danger. The problem of euro has been discussed over years, but it’s still a strong currency.
In short-term, the depreciation of euro might help the eurozone’s economy to recover, as it could incentive the exports, decrease the deficits, etc. But still it’s not a wise decision, because only by weaken the currency cannot really solve the problem inside the EU’s economy. Also, under this kind of instability situation, if the currency is fluctuating, it will do more harm than good to all the countries — for example, France now is facing problems of unemployment and many other economic problems and it need a comparatively stable currency; and for other countries in the euro crisis, keep the currency stable is also keep their own competence stable.
And I totally agree with François Hollande’s saying on “strengthening competitiveness , rather than weakening the currency.”
Currency war is a zero-sum game, so I believe the “next global crisis” will not generate from this.

Paula Heras 20 febrero 2013 - 11:16

I believe Hollande’s proposal is much too risky. Fixing the exchange rate in the Eurozone would be very complex because of the different economic situations of the Member States; what works for Greece is not what works for Germany, so the questions would be who should this benefit? With 27 members, it is clear that not everyone will be happy or even satisfied. But aside from the political issues that might arise from fixing the euro, the economic prospects may not be as ideal as expected. This could be s short term solution, but in the long run it will not be sustainable. We have seen this with many countries in the past, where sometimes it has worked, but in reality in the end it might backfire and make the situation even worse that it was at the beginning. What Europe needs to do, or at least some Member States, is to become more competitive in order to come out of the economic crisis. Such policies and measures as messing with the Euro will only make it more vulnerable in years to come.

Joséphine Kant 20 febrero 2013 - 13:31

First of all, it can be said that there is a general consensus within this forum that letting the financial markets adjust by themselves is an accurate way to represent the true or fair value of a currency. However, whether or not any policies can be taken to enhance promotion of trade without such intervention is a slightly larger dilemma. Promoting exports to balance out the books is a measure being taken by many countries, We should note that promoting exports can also be done through other strategies – such as investment in R&D, benefiting from FTA such as that in the EU or common market and a higher reliance on the service sector – and it seems these are all preferred to exchange rates intervention. I concur with this theory, although we should note that currency wars are an unfortunate reality. I’ll finish with a recent article from the Economist (can also be found in their print edition) highlighted the effects that currency devaluation may have on a global scale, and exploring the positive sides of this:


Miguel Aguirre 20 febrero 2013 - 16:20

Mr.Dragui said this week: “The euro value isn’t a policy target for the ECB” Is this correct? Shouldn’t the institution be aware that the higher value of the euro against other currencies is making exports more expensive from the euro zone?

Naushita Jaising 22 febrero 2013 - 10:44

Given the international political stance against currency wars, the EU traditionally known for its free market tradition, would expectedly meet with a lot of criticism if it engaged in exchange rate intervention, making already hesitant investors more nervous. Although the higher value of the Euro is making exports more expensive for other countries, the EU needs to address this by making indispensable structural changes to gain competitivenes instead of tempting quick-fixes like fixing rates. Moreover, given the Impossible Trinity (trilemma) theory – of it being impossible to have exchange rate intervention, no capital controls and an independent monetary policy at the same time, it would be impossible to sustain this in the long term and would only further threaten the future of the EU. 

Sara Barragán Montes 26 febrero 2013 - 21:09

In my opinion, the European Union, an eternal defensor of the free market, will unlikely make any exchange rate intervention. However, this could be a short-run measure to weaken the exchange rate and increase exports. Of course, while being short-run, it shouldn’t last long, and it should be followed by a long-run policy aiming to strengthen competitiveness – as Germany proposes -.

While being considered a too risky measure, an exchange rate intervention has been useful not only in the case of China – as Rowan says – but also in the case of Malaysia during the Asian financial crisis. I agree with Jorge when saying that “a currency that is intervened will not reflect the true state of the economy” (and that is why this measure shouldn’t last long). However, some actors in the free market scenario also modifies the “true state of the economy”, as currency speculators, who create artificial situations.

To conclude, with or without an exchange rate intervention, the European Union should create a strong common fiscal policy which should include an exchange rate policy resulted from debates among the different member states.

Rafael Rios 27 febrero 2013 - 12:47

As stated in the previous comments, in respect to Mr Hollande’s comment, it makes no sense to have a fixed exchange rate, because this will lead to manipulations of the government and a distortion of the actual price of the currency. This tool could be a good tool to control the currency, but as we have seen in the International Growth course, a floating currency has many more benefits and better reflects the actual state of the country, than a pegged exchange rate as it does not change in respect to market conditions.

Miguel Aguirre 3 marzo 2013 - 10:53

“The notion of increasing net exports of any country facing a crisis is rational due to the theoretical validation that an increase in exports should ideally increase the country’s GDP and improve its future growth prospects. As expressed by my peers, I believe that fixing the exchange rate may help the economy in the short-term, but in the long-term will have very negative consequences and create a serious distortion of reality. In my opinion, the European Union should continue on its path of being a free economy, allowing the currency to reflect the true state of the respective country’s economies.”
Chiara Massironi

Miguel Aguirre 3 marzo 2013 - 16:35

The ECB’s first role is to maintain price stability thanks to money supply, with an objective of less than 2% of inflation. The ECB has no institutional role for helping the economic recovery, as the FED for example has. Fixing the exchange rate would be a short-term refief in the eurozone for competitiveness reasons and it would create a distortion between the money value and the fundamentals of the economy. Moreover, it would be the contrary of what the EU has been promoting since its creation : free market. Another thing is that the question of strengthening or weakening the euro is quite tricky. Indeed, a weakening measure would encourage exports but make some important goods even more expensive, such as oil. And the need concerning the currency exchange rate is really different for countries like Germany and Greece. That’s why, instead of the exchange rate issue that seems hard to solve, Mr. Hollande and his Eurozone counterparts should focus on the fiscal union project that seems more essential for the EU to cope with the crisis.
Melanie Girod

Ruth Talbot 3 marzo 2013 - 22:32

Based on China’s quick recovery from the economic crisis after pegging its exchange rate it is easy to see why France’s Priminister believes this to be a viable solution for the Euro. Pegging the exchange rate has many advantages, most often it keeps the exchange rate low which helps to support the competitiveness of its goods as they are sold abroad.
Despite these advantages I have to agree with the opinion of most of the other comments that the Euro should not be pegged, for the reasons that have already been mentioned. Also, something that should be considered is that the Euro could face some serious problems if and when they decide to un-peg the it and return it to a floating currency. As seen in the case of the Thai Baht when they decided to trade it on the open market in 1996. The currency depreciated and the baht plunged rapidly because the government was unwilling and unable to defend the baht peg using limited reserves. This caused the country to go into extreme debt, a problem that many countries in the euro-zone are already facing.

Ian Haan 4 marzo 2013 - 19:16

The pegging of Chinese Yuan might have aided the country a quick escape out of the recession, but also brought along much debate in the international sphere. The EU and especially the US were experience considerable trade deficits with China, as Chinese products were kept at an artificially low price. This made these chinese exports far more attractive than locally produced products than a free market would allow. This led to an increase tension between the US/EU and China. Although in the case of China the price might have been small to pay; increased tension with the US for the EU would be counter productive. As of February 2013 the US and the EU have commenced formal talks on a free trade agreement. This deal would bring down trading barriers between the two biggest economies in the world. The EU estimates that such a agreement alone will boost annual GDP growth by 0.5%.
This promising agreement will certainly be in danger and most likely abandoned, if the Euro were to be pegged.

Julien GONCALVES 5 marzo 2013 - 15:28

To my opinion, nearly everything has been said above. However, to come back on the original questions about Eurozone’s top priority, I believe that “strengthening competitiveness” should be a long term goal and “weakening the currency” a possible short-run tool for that. We all know that weakening a currency does not allow a stable growth of exports. However, it could generate enough income to invest in state-of-the-art factories or in researching innovative products and I agree with Melanie who said that it would be contrary to the free market trends encouraged by EU.
I personally think that euro value should be a policy target for the ECB, ECB should take into account the economical perspectives. The problem is : this institution is not entitled to do so. The mistake has been made from the beginning. Anyhow, it would be very tricky for all the EU countries to agree on common policy target as each of them have different national economic models.

Koteki Inaba 7 marzo 2013 - 21:04

According to the previous comments made by my peers, I have to agree with that the Euro should not be pegged, due to the reasons that have been mentioned. Referring to the original question about whether or not the ECB should factor the strength of the euro or if it should take the decision, like Japan to weaken the exchange rate of the yen, I believe the ECB should definitely factor the strength of the euro and secondly that the euro value should be a policy for the ECB. There are a growing number of countries, like Japan, that are seeking to weaken their currencies. The case of Japan was much criticized by European leaders, accusing Japan of currency manipulation. Although it is a risky strategy, I believe a falling currency is a sign of a country in decline, and of a country that has very few options other than to let a currency depreciate markedly to increase sales of cheaper exports, and thus drive GDP higher. Weakening an exchange rate may evidently help a country in the long run, but the case of Japan could lead to a currency war if it drives down the economies of Japan’s allies. I think the ECB should thus instead reinforce monetary union with greater fiscal union, political integration and finally banking union.

Miguel Aguirre 8 marzo 2013 - 12:54

Last Thursday in the Wall Street Journal we found the following information:
“Exports from the 17 countries that use the euro fell at the fastest rate in almost four years in the 2012 fourth quarter, official data showed, giving fresh weight to concerns among the bloc´s leaders that recent rises in the euro´s exchange rate are damaging the chances of an economic recovery”
The figures mean that the net trade, the difference between exports and imports, made no contribution to euro-zone economic output in that period

Yunqi Wu 9 marzo 2013 - 14:37

Despite all the disadvantages mentioned by my classmates above, I think that the devaluation of Euro will happen and it’s just a matter of time. Statistic has shown that by maintaining itself a strong currency, Euro has largely hurt the European economy as it is making exports much more expensive in other countries. In the fourth quarter of 2012, imports in the currency bloc also fell due to weak consumer demands. If the ECB were to intervene the in the currency market, it’s the one of the most obvious and effective methods to weaken the exchange rate of Euro in order to help the economy in the peripheral countries recover in the short run. Thus, their current account deficits will decrease and in turn boost the country competitiveness to attract more foreign investors. Of course, this would only be a remedy for the moment, the ECB should take accommodative measures in the long run to readapt the value of Euro to an appropriate level and keep the price stable in the eurozone.

Mélanie Girod 10 marzo 2013 - 12:36

As it has been said above, the problem of the euro is even trickier as it can damage the changes of recovery. However, it seems that (according to another article of the Wall Street Journal) the ECB has reached its limits to act. Indeed, in the growing debate of the possible devaluation of the euro, M. Draghi let it clear that the ECB had nothing more to do, and that is the national governments’ job to make the required reforms to improve the countries’ competitiveness. The ECB stays in the scope of responsibilities the European treaties gave it and states have to be aware of their own duties.
To finish, an ironic fact : it seems that when the economy’s chances of recovery are lowering, the euro-confidence rises (for businesses and consumers). Indeed, the indicator is at its highest level since May 2012, whereas the other macroeconomic indicators are deteriorating …


Brett Mennella 11 marzo 2013 - 17:00

Miguel Aguierre’s comment that net exports “made no contribution to the euro-zone economic output” over the past year supports the majority of statements made above that a floating exchange rate and free-trade economy is the best route for future economic growth within the European Union. Setting a fixed exchange rate, most commonly used to promote exports, would have little or no effect on current economic growth. It also would be an inaccurate representation of the current economic conditions, which would reduce the trade credibility and financial transparency of the region in a time where that matters most. Improving productivity through technology and education are much more effective methods of advancing economic growth, although they require significant capital investment and long-term commitment. Devaluing the Euro could also lead to unforeseen international consequences, such as a real currency war. The United States and China are currently experiencing or heading towards a currency war due to their opposing monetary policies, and the same could happen to the European Union. By fixing its currency, the EU could catalyze a conflict between itself and other prominent global powers, like the United States, who is experiencing similar currency problems with the dollar. Overall, continuing the use of a floating exchange rate policy and finding alternative forms of economic expansion is the best route for the ECB.

David Stranghoener 11 marzo 2013 - 17:03

As others have touched on, intentionally deflating the Euro is only a short term solution to a long term problem. If the currency is deflated, the increased demand of European goods will inevitably lead it to rise again back to current market-based levels. When this happens, the European Central Bank will find themselves in the same situation they are in now. Devaluation will simply push back the problem of dealing with weak exports a few years, and, in the meantime, EU residents will have to deal with more expensive imports due to the lower purchasing power of their currency. In fact, the short term “solution” to weak EU exports may actually make the long term problem even worse. Countries and companies seeing higher exports in the short term due to a weaker Euro may be less inclined to “strengthen (their) competitiveness” as Francois Hollande put it. Instead of investing in the future viability of their export sectors, countries may be satisfied with their newly increased export levels and cease investing at the necessary levels needed to improve their future success. Instead of using this short term solution, the EU should use a longer term approach by investing in ways to stay competitive in the global marketplace and ensure European exports remain necessary and attractive to the rest of the world no matter what the exchange rate is.

Manuel Bobone 11 marzo 2013 - 23:24

The euro case is different from the other currencies, because it doesn’t represent the real value of any economy, but an average of all these countries. So deflating the Euro could be an option as a lot of the euro area economies are below its current value. allowing the countries that are facing more difficulties to increase their exports. But as I said earlier, it is not the only solution, for example in Portugal exports have increased for a long time until the strike of the stevedores, despite the value of the euro.

Stephanie Uribe 12 marzo 2013 - 15:08

I agree with Jorge Schnura, if Mr. Hollande wants the ECB to intevene for consumer confidence, then he is going about it wrong. A free economy is needed for real valuation and for true knowledge of what your country’s status is in real time. Instead he should encourage the EU citizens that the government is doing its job through exports and austerity measures. To give the European people and investors confidence that this will help in the future. To be honest and let them know that it will not be easy. But in the long run it will be better. Instead of keeping the public in ignorant bliss about exchange rates with fake exchange rate appreciation, the government needs to start educating the public on the hard realities of a financial crisis and the sacrifices through long-term structural reform that will need to be made in order to turn the economy around.

Ben Syang 19 marzo 2013 - 13:49

Last year, I actually read the first few chapters of James Rickards’ book. Within the book, he describes this military simulation conducted by the CIA. This simulation was different in that it was the first of its kind to utilize not soldiers and weapons, but currency instruments as weapons of war between different countries.

The term “currency war” was coined by Brazil Finance Minister Guido Mantega. In fact, he was cited again in the following article from February 2013. (http://www.reuters.com/article/2013/02/08/us-g20-brazil-euro-idUSBRE9170N220130208)

In the article, Guido Mantega specifically addresses the impact of a European introduction into the “global currency war.” There is a point that I definitely agree with from Guido, where he says that competitive devaluations equate to “battling over scraps.” I will admit that Guido is somewhat of a hipocrite, as Brazil has actively been trying to devalue its currency.

As our economies become truly interconnected and global, Guido’s point ultimately becomes truth. When you raise tariffs against a country, that country will raise tariffs against you. Same goes for currencies: when you lower the value of your currency, so does another country. Like tariffs and other protectionist policies, currency devaluation is a hindrance to free market operations. I don’t think that such policies are beneficial to the global economy. In fact, we have seen fixed exchange rate policies severely hampering economic progress in other countries – notably Venezuela.

Josephine Kant 12 abril 2013 - 10:36

As we’ve been discussing a lot about currency wars on this blog, I wanted to spark a new debate on a different type of currency: the Bitcoin. For those of you that haven’t heard about Bitcoin yet, it is a global “virtual” private currency. It has gained a lot of media attention lately as it has been reported to be a scam and even deemed a “ponzi scheme”. Many investors believe that this internet currency will soon collapse and that it is not protected well enough. So what does a virtual currency have to do with a global currency war? Well, the Bitcoin value fluctuates depending on demand and supply just like in the real currency markets – so the value could easily fall by 100%, scamming people of their money.

When the bitcoin was created 4 years ago, it traded for less than 1 cent. One year ago, the bitcoin was at $5 and now their aggregate value (around 11 million coins are circulating freely) is fluctuating without certainty between $1 and $2 billion. Whilst technologically genius, bitcoins have been used for illegal transactions and private currencies have never really seemed to catch on before. I would be interested to know what you think about this, whether it is just a bubble waiting to burst or if there is a real potential for this to kick off. My personal opinion is that the world is not yet ready for a stable money supply without any government involvement.

Nicoleta Chiriac 14 abril 2013 - 23:37

I was recently listening to an interview with James Rickards, the author of currency wars and he brought up many interesting points about what is happening in the world today. He claimed that history is full of corrupt governments which manufacture a currency in order to preserve their power. This reaches back to the Roman Empire when the silver coin was debased by using led in order to fight budget deficits by debasing the currency. He states that today it is very important for us to restore fate in paper money. Debasing the currency as the US, China, and the EU is doing leads to a loss in the trust of the money, and when people don’t trust money that means that they don’t trust the government. Furthermore, if we have a weak currency than how is anyone going to invest in our country in the long run? The US is the biggest currency manipulator in the world. Through monetary easing, by printing money and lowering the interest rate, they are cheapening the value of the dollar, making exports more attractive. In theory this is a good principle, but it does not work this way because there is retaliation as other countries start to cheapen their currency as well. They will start to put on capital controls and excise taxes and this way a currency war can turn into a trade war. Based on all this I do not think that the EU should weaken their currency as many of my colleagues have already stated. If the EU intervenes with the currency, something which the ECB is not in charge, trade will not be promoted, actually in the long run it will suffer. History has shown that this is not a good solution many times in the past.

To answer Josephine’s comment about the Bitcoin, I’m not so sure I understand how the fact that the value fluctuates just like in real currency leads to scamming people of their money. I don’t think the world is ready for this type of money not because of the lack of government intervention, but because in order for money to work people need to trust in it. That is why money used to be valued based on a gold standard. People need some sort of validation that the money they have today will be worth something tomorrow.

Baihly Underhill 18 abril 2013 - 16:57

While I do find it interesting that the Eurozone exports suffered as much as they did due to the rise in currency, I still do not believe this to be reason enough to abandon their current methods. As many previously mentioned. The rise in price of the euro is a reflection of the performance of the eurozone market, and to alter the pricing mechanisms would, in my opinion, do a great injustice not only to those purchasing the products, but also do the firms creating the products for exports, as they would be losing value on their products. I think that this is merely a short term solution for a long term problem, which should be adjusted within each individual economy as they try to improve their exports.

Caroline Ramos 21 abril 2013 - 23:02

For countries in the EU, it is very difficult to promote exportation with the currency so appreciated. Exportation has been seeing as an extreme important policy for many countries after 2008 crisis. So I see Mr. Hollands’s point, who seems to defend an exchange rate intervention. However I am not sure that this intervention would be good for the EU, because the countries have economic differences, which can make it difficult to control the exchange rate. Moreover, this intervention can also distort the real value of the currency.

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