The Guardian view on global currencies: it’s the economy, stupid. / Editorial / Guardian

The Guardian view on global currencies: it’s the economy, stupid

Editorial / Guardian / Friday 14 August 2015 19.34 BST / http://www.theguardian.com/commentisfree/2015/aug/14/guardian-on-global-currencies-its-the-economy-stupid-yuan-euro

Whether it’s the yuan or the euro, the lesson of history is that the currency should be arranged around the economy. Not the other way around

History is littered with upside-down verdicts about exchange rates. In the Britain of 1925, for example, there were misguided cheers when Churchill pushed industry into the doldrums by pretending the first world war had never happened, and forcing sterling back up to its 1914 parity. In 1992, misguided tears accompanied the UK’s inelegant tumble out of the exchange rate mechanism, a long-dreaded devaluation which proved a terrific stimulus for recovery. In this week’s headlines, currency gyrations have once again been causing confusion.

Greece was said to have shuffled “back from the edge” by clinging on to the euro, while China, by pushing the yuan’s value down, was described as pushing the world “to the brink” of a currency war. The real contrast cannot be measured in steps from any precipice. It is between Athens reordering a stricken economy around a currency, and Beijing rearranging its money to fit in with the needs of its economy. By signing up to the fresh dose of austerity, which the Greek parliamenton Friday accepted as the price of remaining in the single currency club, Alexis Tsipras’s leftwing government has fallen into line with respectable financial opinion, while submitting its families and factories to disruptive adjustments. But Beijing displayed disdain for the expectation of the currency markets, as it moved to shore up the stability of Chinese business.

The lesson of experience is that things tend to play out more happily when the economy comes first, and the currency second, and not the other way around. Despite an upward blip in the latest Greek data, which was obviously collected before the new bailout, its great depression grinds on. The next round of retrenchment pushes hope beyond the horizon. But the dramatic slowdown in China, which was precipitated by an almighty stock market bubble and bust for which Beijing carries much blame, could now be alleviated by the lower yuan. The workshop of the world’s attempts to nurture homegrown prosperity might be faltering, but in export-led growth its record is second to none. Its extraordinary competitive edge in so many product markets around the world had been blunted because the yuan was pegged to a rising dollar. It should surprise no one if it wishes to restore this lost edge as its economy slows.

If the effects for China itself are most likely benign, those for the rest of the world are much more uncertain. Even in the US the recovery remains relatively fragile; in Europe, it hardly exists. Neither is in a condition to absorb a glut of cheap Chinese imports comfortably, especially because it will push down consumer prices when the west already stands close to the deflationary swamp. But it is not all bad news: if cheap Chinese goods are pushing down inflation, the painful moment at which central banks start jacking up interest rates might be deferred. The most alarmist commentary, however, has not been about such immediate effects; these will not be dramatic if the yuan stabilises after losses of a mere 3% or so, as it was doing on Friday.

No, the real fear is instead that Beijing’s actions will provoke a self-defeating spiral of mutually negating devaluations, in which every country plays “beggar my neighbour” by cheapening its currency, but then getting begged itself, as its neighbour responds in kind. The fear of this sort of currency war is associated with fading half-memories of the 1930s, when exchange-rate competition and rising trade tariffs were two economic manifestations of rising nationalism. The tariffs, in particular, were probably unhelpful. The important point, however, is that both policies arose only in response to the Great Depression – they had no part in causing it. The trouble started not with chaotic currency wars, but with a collapse in confidence which the rigid monetary rules of the gold standard reinforced and spread round the world. Britain began to recover after being forced off gold in 1931, and Roosevelt kick-started US recovery two years later by breaking free of the golden fetters. Competitive devaluations inevitably cancelled one another out when it came to trade flows, but that doesn’t mean that the global scramble to cheapen currencies did no good. Easier money could make the heavy debt of the era more manageable in several countries at once.

Which brings us back to our own indebted and depressed times. The real lessons of history, which Beijing appears to understand better than Athens, is to arrange currencies around the needs of economies – and then to treat rules and institutions that require the opposite with disorderly disdain.