Currency war is destructive to global economy and trade

Currency war is destructive to global economy and trade

The euro is losing ground against the US dollar. The European Central Bank’s (ECB) policy of easy money and Quantitative Easing is outpacing the US Federal Reserve, which is indicating tightening money in the future, writes Prince Michael of Liechtenstein.

Russia’s rouble is tumbling, and one of the world’s strongest economies, in Singapore, has announced that its Central Bank will intervene to weaken the currency and support Singapore's competitiveness.

Turkey wants to reduce interest rates which will devalue the lira even more and Australia and Canada are following suit.

The US dollar is strong. America’s economy is showing self-confidence and the Fed is indicating an eventual and gradual increase in interest rates to support the currency.

A currency race to the bottom is a disastrous sign of the state of the world economy. Europe is a good example to explain the problem.

Europe’s economic problem is its lack of growth. Europe has outstanding engineers, technicians, scientists and some of the world's best run companies. Despite this, Europe is the economic sick man of the world through its lack of growth.

Europe's problem is too much government and too much regulation. But instead of addressing these problems, Europe - with the help of the ECB’s monetary policy - is experimenting with Quantitative Easing (QE) and zero to negative interest rates.

Unfortunately, the money generated does not flow down to business. Business lacks the confidence to invest and many banks lack sufficient equity to increase their loan portfolio. As a consequence of QE the euro is becoming unattractive and declining as a result of this policy - whether intended or not.

This raises Europe’s competitiveness on export markets in the short term, although imports become more expensive. But it does not force an increase in productivity and real competitiveness in innovation, quality, and process optimisation in the economy.

This is an unsustainable illusion of competitiveness.

A short cyclical decline would not be such a problem. But this appears to be a structural policy combined with the inflation target.

Europe's economy has a unique bonus from the decline in oil prices. The current situation could be used, when combined with necessary political reforms, to return the European economy to global competitiveness. However, the political will to de-regulate and address necessary infrastructure projects is lacklustre.

So the euro is likely to continue its weakness and Europe is therefore contributing to perpetuating the current global economic crisis.

This ‘Beggar thy neighbour’ policy contributed hugely to problems of the Great Depression in the 1930s.

The problem is not too great if devaluation is used by a number of smaller economies. But it is a disaster if it becomes a global race among major economies.

Such a ‘currency war’ is destructive to global trade and economic development.

Related reports:

Weaker euro could provide European business with an edge

Greek economic crisis could be catalyst for change in Europe

Economic expectations for Europe and US differ widely in 2015

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