Daniel W. Drezner

The currency war lobby

The currency war lobby

About six months ago, when the world’s major central banks all started pursuing aggressive strategies of quantitative easing, I blogged that, "the international bitching and moaning about QE3 seems much less than the ‘currency war’ rhetoric that QE2 triggered."

With Japan’s decision to unleash the monetary taps, the "currency war" meme has cropped up again, but in an odd way. To be honest, I’m reading a lot more essays that smack down the "currency war" claim than are making it. For recent and salient smackdowns, see Felix Salmon, Mario Draghi, Gavyn Davies, Philipp Hildebrand, Matthew Yglesias, and Paola Subacchi

So this raises an awkward question — who is claiming that there’s a currency war and why? Is there a lobby that’s agitating for an end to certain policies and using the guise of a "currency war" to try to make it happen? Who are these shadowy groups? 

As near as I can determine, there are three interest groups with the motivated interest in doing this: 

1) The Bundesbank. One can think of the eurozone crisis as one long, inexorable weakening of the Bundesbank’s grip on European monetary policy. Bundesbank president Jens Weidemann set off the latest round of currency war puffery in a speech in which he bemoaned the "increased politicisation of exchange rates" and warned that central bank indepenence was eroding. Now I’m not a German-speaker, but it’s possible that when Weidemann says central bank independence is "eroding" he means, "I don’t have a veto over eurozone monetary policy like I used to and Draghi won’t return my calls." 

2) The bond funds. Bondholders aren’t big fans of inflating currencies, which is the designed effect of this collective round of quantitative easing. Or, to put it more pithily, it’s not a currency war unless someone at PIMCO is hyping it!! In this case, Mohammed El-Erian

[T]here is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes. Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization.

Yet, when push comes to shove, country after country is being dragged into abetting a potentially harmful outcome for the global economy as a whole. Worse, this process has not yet registered seriously on the multilateral policy agenda.

El-Erian needs to read the Financial Times a bit more often. The problem isn’t that this isn’t on the "multilateral policy agenda" — it’s that these global governance structures are less stressed about it than El-Erian: 

The world’s largest developed nations reaffirmed their commitment not to target exchange rates in a statement on Tuesday aimed at addressing concerns over a fresh round of global currency wars.

In a move widely seen as an attempt to defuse tensions over recent rapid moves in the currency market, the Group of Seven countries — comprising the US, the UK, France, Germany, Italy, Canada, and Japan — said they would “consult closely” on any action in foreign exchange markets.

"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the ministers and governors said.

This doesn’t sound like the G-7 is all that troubled — or, to put it more bluntly, not as troubled as El-Erian wants them to be. 

3)  The developing world. While the G-7 seems pretty copacetic with the combined quantitative easing, the G-20 is another matter

The words “currency wars” are too blunt for a G20 communique, but that is what the world’s finance ministers will talk about when they meet in Moscow this week.

A new round of monetary easing in advanced economies is pushing down their currencies and prompting howls of protest from the developing world.

Indeed, the most cogent critiques of the developed world’s combined QE strategy comes from officials and op-ed writers focused on the less developed world. And to be sure, the combined effect of developed country actions on the monetary front can create some policy problems in the developing world. 

Again, though, what’s striking isn’t the vocal complaints about currency wars in 2013 but the relative absence of them compared to, say, the fall of 2010 after QE2. Which suggests that while there might be some mild grumbling among the advanced developing countries, they prefer the status quo to policies that cause the OECD economies to contract in size.

So, to sum up: when you read about someone voicing "grave concern" about currency wars, see if they are based in A) an export-dependent developing economy; B) a bond fund; or C) the German central bank.  If they are, you can safely tune them out.  It’s when people outside those places start carping that I’ll start getting concerned about a currency war. 

Am I missing anything?