With estimates of U.S. and world economic growth deteriorating by the week, it is not surprising that political leaders are flirting once again with seemingly simple but failed ideas. The latest trendy so-called solution is a weaker U.S. dollar. European leaders who themselves have experienced the nefarious effects of a weak euro have jumped on the bandwagon of U.S. exporters to argue that a weaker U.S. currency would be good for the United States and good for the world. If nothing else, they argue, it would make energy costs in Europe cheaper and would therefore diminish inflationary pressures on the continent. That may be so, but it is not sufficient reason to try to create havoc in world currency markets and to shake confidence in the U.S. dollar and economy. A falling U.S. dollar will not spur world economic growth.
Contrary to the recent pronouncements of these European political leaders and U.S. exporters, a drop in the dollar would do more harm than good to the United States and the world economy. At the very least, a falling dollar would shake the confidence of foreign investors in the U.S. economy by reducing investment returns. Stock markets in the United States do not need a sharp retrenchment in inward investment to shatter the fragile support of U.S. investors. Think of the effects of a sharp drop in U.S. stock markets on consumer confidence and spending. Needless to say, a sharp decline in the U.S. dollar also would poten-tially feed inflation, while doing very little to fuel European or Japanese growth. As the leaders of the industrial nations prepare to meet in Genoa next week, let us hope that they shy away from superficially attractive but dangerous ideas.
It is rather ironic, but not surprising, that those very countries in Europe that worry about their own weak currencies and slowing economies are prescribing the weak greenback as a solution to international problems. Europe had hoped it would escape the U.S. slowdown, and continues to believe that disgruntled investors in the United States might move their capital to European markets. Meanwhile, the European Parliament has blocked measures that would have facilitated cross-border mergers; the French have introduced regulations that would strengthen dismissals legislation; the EU is toying with the idea of a tax on foreign currency trading; and the Germans want unions to have a greater say in proposed mergers and acquisitions. Anyone involved in attracting globally mobile capital or companies would know that such regulatory excesses hurt the euro and the European economy. Regulatory reform and a healthy dose of pro-business policies would do more to strengthen the euro than the proposed concerted actions to talk down the U.S. dollar.
In any event, the U.S. economy is suffering from overcapacity, reduced investment and weak international demand. The idea that a weak U.S. dollar would spur demand abroad and trigger a new investment cycle in the United States and elsewhere in the world overlooks the deeper issues con-fronting the world economy. Granted, U.S. exporters must struggle with brutally com-petitive pressures that have been exacerbated by a strong currency. They have had to write down earnings to reflect the con-version of foreign revenues into U.S. dollars, and have disappointed investors. Nevertheless, the problems caused by a synchronized slowdown of the world economy are not simply currency driven.
Japan has stagnated for more than a decade through the highs and lows of the Japanese yen. Proposals put forth by Prime Minister Koizumi are splitting his party and, in all likelihood, will be heavily diluted if they are ever implemented. In the short term, these measures would fuel Japanese deflation and contribute little to world economic recovery. On the contrary, the Asian region is likely to plunge further into recession as Japan’s problems continue and U.S. demand remains sluggish. There is little a weaker dollar would do to push Japan quickly towards structural reform and macroeconomic stimulation.
Similarly, Europe is mired in its own political weakness and soul-searching as it watches the United States cut taxes and reduce interest rates.The call for even more from the United States—including a lower dollar and a concomitant drop in standard of living—is but another example of Europe’s inability to assume global responsibilities and to awaken to the exigencies of a globally competitive economy. Let us hope that the G7 countries will recognize that, whilst they cannot steer currency markets, they can adopt policies and attitudes that have been proven to be more conducive to investment and global growth—and competitive devaluation is not one of them.