BRUSSELS – Guido Mantega, Brazil’s finance minister, aptly captured the current monetary Zeitgeist when he spoke of a looming “currency war.” What had seemed a bilateral dispute between the United States and China over the renminbi’s exchange rate has mutated into a general controversy over capital flows and currencies.
Today, every country seems to want to depreciate its currency. Japan has resumed foreign-exchange intervention, and the US Federal Reserve and the Bank of England are preparing another large-scale purchase of government bonds – a measure called “quantitative easing,” which lowers long-term interest rates and indirectly weakens the currency.
China is fiercely resisting US and European pressure to accelerate the snail-paced appreciation of the renminbi against the dollar. Emerging-market countries are turning to an array of techniques to discourage capital inflows or sterilize their effect on the exchange rate.
Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short-term interest rate. But even the ECB cannot be indifferent to the risks of appreciation, because a strong euro may seriously complicate economic adjustment in countries like Spain, Portugal, Greece, and Ireland … //
… For each central bank, the question is not what happens to, say, emerging countries as a whole, but what happens to its own currency vis-à-vis competitors. So Brazil does not want to appreciate vis-à-vis other Latin American countries, Thailand does not want to appreciate vis-à-vis other Asian countries, and no one wants to appreciate vis-à-vis China, which fears that renminbi appreciation would lead labor-intensive industries to migrate to Vietnam or Bangladesh. Thus, a change that is in everyone’s interest is hampered by lack of coordination.
Quantitative easing in the advanced countries also raises a question of coordination. QE is a legitimate monetary-policy instrument, but the Fed and the Bank of England would probably not embrace it with such enthusiasm were it not for the anticipated exchange-rate depreciation. In fact, the ECB’s perceived reluctance to follow suit is likely to add to the expected growth effects of US or British monetary-policy choices, at the expense of the eurozone.
The controversy over China’s exchange-rate policy thus is no mere bilateral US-China trade dispute, but rather a global macroeconomic clash between advanced and emerging countries. Moreover, the lack of coordination in both advanced and emerging countries suggests that the solution to currency wars is not to declare a truce, but to recognize the nature of the issue and overcome the problems that stand in the way of agreed common solutions.
This is not to say that the renminbi’s exchange rate is a secondary issue. On the contrary, its importance stems from the fact that China holds the key to global adjustment. The recent IMF/World Bank annual meetings indicate that this is gradually being recognized, with emerging countries increasingly critical of China’s inflexibility.
So now is the IMF’s moment. The Fund should propose a conceptual framework for the discussions to be held on exchange-rate problems by providing an objective assessment of the adjustments that are needed, and by facilitating settlement within the multilateral framework. The IMF cannot substitute for governments’ choices. But it can help the search for a solution.
Jean Pisani-Ferry is Director of Bruegel, the European think tank. (full text).