G20 Summit Distracted by 'Currency Wars'

Fears of protectionist battles over trade and exchange rates are overblown. The G20 really needs to focus on stimulating growth

If the G20 is going to be nothing more than a talking shop on economic issues, they ought at least to talk about the economic problems that really matter, and the ones they can do something about. Not that currency values don't matter - they are actually very important. And it is interesting to see them getting some attention, after the media ignored, for example, the fact that an overvalued dollar was the main cause of the United States's loss of nearly a third of its manufacturing jobs over the last decade.

But we are many years, if not decades, away from a multilateral agreement on currencies. It took a Great Depression and the second world war to get us the Bretton Woods system of fixed exchange rates; the current group of governments will never resolve something this difficult when they can't even come up with a coherent analysis of the problem.

First things first. The most immediate problem facing the world economy is that the high-income economies - including the United States, Europe and Japan - are barely recovering from their recessions. The IMF pointed this out in their semi-annual World Economic Outlook last month, noting that the recoveries of the high-income economies "will remain fragile for as long as improving business investment does not translate into higher employment growth". Unfortunately, this is everybody's concern because these countries make up the majority of the world's economy.

Now, this is something that the G20 governments could actually do something about, not least because some of them are actively making things worse. The European authorities - which include the European Commission, the European Central Bank and the IMF (which is subordinate to these authorities in Europe) - are choking off recovery in Spain, Ireland, Greece, Portugal, and other countries. Ireland's borrowing costs just jumped 3 percentage points in the last three weeks - from 6% to a potentially explosive 9% - because its austerity policies are having the predictable effect of tanking the economy. Spain just racked up zero growth for the third quarter and hardly any for the whole year, with unemployment at 20%. In just the last six months, the IMF has had to lower the forecast for GDP growth in Greece from negative 2% to negative 4%, for the same reasons; and if all goes well according to their austerity plan, Greece will have a debt of 144% of GDP in 2013, up from 115% in 2009.

It is a great irony that any of these governments or authorities now complain when the US Federal Reserve actually does something right. The Federal Reserve's "quantitative easing" (creating money and using it to buy long-term government bonds) is exactly what any responsible central bank should do when its national economy is this depressed. Unfortunately, because long-term rates are already extremely low, the impact of an additional $600bn of purchases over the next six months is likely to be minimal. But the Fed's action lowers the United States' net debt burden, since the interest payments on the debt that the Fed buys will now revert to the US Treasury.

By "monetising" this debt - and therefore getting rid of this interest burden on it - the Fed has created more space for President Obama and the US Congress to provide some badly-needed stimulus spending. If China, with an economy less than three quarters the size of the United States's (less than half at current exchange rates), can commit to $735bn of investment in low-carbon energy over the next decade, what do you think the United States could do to reduce climate disruption while providing some jobs for the 15m (officially) US unemployed?

So, if anyone wants to complain about what the US government is currently doing, or not doing, to the world economy, complaints should first go to the Congress and the president, who have failed to provide the necessary fiscal stimulus - not the Fed. The best thing that the European Central Bank could do is imitate the Fed, and help the weaker Eurozone economies restore economic growth, rather than pushing them back toward recession.

Some countries are worried that the Fed's maintaining low long-term rates will send too much money into their own economies, seeking a higher return, and driving up the value of their currencies. But these governments can reduce these inflows with capital controls, including taxes on various forms of incoming investment.

This whole threat of "currency wars" and a plunge into the protectionist abyss is quite exaggerated. For more than a decade, we have been repeatedly warned of a protectionist nightmare, threatening to grind the world economy to the halt - if the Doha Round of the WTO did not make progress. But the negotiations to liberalise trade and commerce went nowhere, while world exports more than doubled in just the five years from 2002-2007. When the crash finally came, it had nothing to do with protectionism - if anything, it had more to do with liberalisation in the financial sector.

The most immediate threat to the world economy at present comes not from "currency wars" or protectionism, but from overly conservative, dogma-driven macroeconomic policies. It's a shame that this wasn't a major item on the G20 agenda.

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