Mirror, mirror on the wall, who’s the weakest of them all?
As G20 finance ministers warn of the threat of a “global currency war” at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.
The first is that every country’s objective in this war is to “lose” by making its currency weaker. This is because a weak currency tends to support exports, employment and economic growth.
The second oddity is that the clear winner has not been Japan, Switzerland, or China, but a country rarely accused of financial aggression: Britain.
Since the global financial crisis started in mid-2007, sterling has been, by a wide margin, the weakest major currency. The Bank of England’s trade-weighted sterling index fell by a record 30% in early 2009 and, despite a modest rebound in 2010-12, it remains 24% below its level of mid-2007. Japan, by contrast, has endured a rise in its trade-weighted exchange rate of 60% from Jul 2007 to late last year, when prime minister Shinzo Abe committed his new government to a more competitive rate.
But let us return to the biggest “winner” in the post-crisis currency wars, Britain. Sterling’s devaluation has clearly been no panacea. Britain has done worse on most measures of economic performance since 2008 than any G7 country apart from Italy. That, however, may have been inevitable. London’s dominant role in international finance made Britain more vulnerable than any other major economy to the greatest banking crisis in history.
And once that was over, prime minister David Cameron imposed the toughest budgetary austerity in the G7. An important issue today is what may happen next to Britain.
Since the end of last year the pound has weakened dramatically against all other major currencies, apart from the yen. As a result, both the Bank of England and the Bank of Japan are undergoing radical management changes.
Japan, of course, is used to policy uncertainty and political upheavals, having dealt with six prime ministers in the past five years. But for investors and businesses in Britain the new unpredictability of politics and economic policy may come as a rude shock.
There are three reasons to expect Mark Carney, the next governor of the Bank of England, to experiment with new and potentially more aggressive versions of monetary policy when he takes over in July.
First, Carney has repeatedly said that monetary policy could do more for growth in Britain, in sharp contrast to Mervyn King, the present governor, who believes the effectiveness of monetary stimulus has been exhausted.
Second, Cameron presumably took the unprecedented decision to appoint a foreign citizen to the BoE for a reason, most likely to have the option of blaming the BoE ancien regime for the economy’s disappointing performance. For such a charge to stick, the new BoE management would have to adopt a discernibly different monetary policy.
Finally, Carney is known to be interested in a political career in Canada. His chances of success would be greatly enhanced if he could return to Ottawa as the British economy’s radical saviour.
Regarding fiscal policy, it is now almost impossible for the British government to hit its budgetary targets.
Finally, political uncertainty is bound to intensify in Britain, even as it subsides in the rest of Europe and the US. In the three years since Cameron’s election Britain has had the most stable and predictable government in Europe.
This will change as the election approaches.
In short, Britain is in the process of transformation into one of the world’s most unpredictable economies.
Small wonder that the pound has again started falling after its modest rebound since 2010. Britain could again become a quiet winner in the global weak-currency war.
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