All the fuss at the G7 and the G20 about whether Japan should be condemned for attempting to end decades of stagnation by easing monetary policy, with the effect of driving down the yen, makes for good copy, especially as the various G7 spokesmen put on a Keystone Kops performance after the meeting.
One said the agreement to let markets set exchange rates was aimed at Japan, its new prime minister, Shinzo Abe, having talked its currency down by 20% against the dollar since September. Then another spokesman said it wasn’t aimed at any particular country.
No matter: those hurling the first brickbat had to be careful. Both Britain and America have presided over policies that have driven down the value of their currencies. In the UK’s case, this has sterling sitting at a 15-month low against the euro.
Regardless of what a G-something communiqué says, Japan has no intention of preventing a further fall in the yen; Britain is delighted sterling has fallen against the euro; Federal Reserve Board chairman Ben Bernanke will continue printing money that has the unintended (?) effect of keeping the dollar lower than it would otherwise be; and the bleats of François Hollande about an overvalued euro are falling on deaf ears in Berlin. When it comes to policies that affect the exchange rate, politicians will do whatever they believe will increase their nation’s growth rate and lower its unemployment rate.
The more important question concerns whether the world is always better served by international economic co-operation of the sort that is supposed to result from G-meetings and other such gatherings, or by competition among nations for economic advantage. The unfortunately complicated answer is that it all depends.
Consider the financial sector. Since Lehman Brothers imploded, we know the effects of failure here are tsunamis rather than ripples. When it comes to banks we are indeed all in this together. Inadequately capitalised banks in one country are a threat to the stability of the entire international banking system, because their IOUs prove worthless or because a bank failure shakes investor and depositor confidence in others.
Then there is an interconnectedness that becomes visible only in a crisis—some dicey mortgage loans by American banks can create real problems for banks around the world that buy mortgage- backed securities. Not quite the flapping of a butterfly’s wings in Brazil that might change the weather in Texas, but close. So here is an area in which co-operation of regulators, banks, and other institutions—co-operation that does not extend to cartel behaviour, however—serves a useful purpose.
So too with some, but not all, environmental problems. Without co-operation from other nations, it avails a country nought to reduce its carbon emissions, unless satisfying some ideological green politician is considered a public good. International co-operation is required lest cuts in emissions by, say, Britain and the United States are more than offset by the construction of new coal plants in China, India and, lately, Germany. All in all, 1,000 new coal-fired power stations are being planned worldwide, unless Beijing’s recent sooty cloud has caused a rethink by the regime.
Taxes are a different matter. When it comes to fraud, cross-border co-operation of law enforcement authorities is useful. But in setting tax rates, competition among nations serves the public better than would a tax-setting cartel. Were it not for the threat of an exodus of transactions from the EU, the so-called Tobin tax on all trades would already be in place. And were it not for its low corporate tax rates, Ireland would not be on the cusp of a recovery. Moans from Paris, London and Berlin: Dublin is saying to international companies, come here and keep more of your earnings for your shareholders rather than turning them over to some government. The solution for countries that have chosen a high-spending, high-tax model is to lower taxes, but they prefer to try to force more competitive jurisdictions to join their high-tax cartel.
Then there are cases that require a mixture of co-operation and competition, among them competition policy itself. It is important for enforcement authorities to keep each other informed of studies of various markets, to share data when they can, and generally to co-operate in developing an understanding of how complex markets work. But it is equally important for them to compete with each other in developing ideas as to what constitutes market dominance and anticompetitive behaviour. Thus, when antitrust enforcement lacked vigour during the reign of the elder George Bush, the European Commission continued its pursuit of anticompetitive acts, to the consternation of many American politicians. Competition among competition enforcers proved to be a good thing for the consumer.
So, too, in trade. Co-operation is required to set the rules, but competition is required if consumers are to benefit from the efficiencies that flow from having the nation with the best, most competitively priced products win the game. Thus, it might be a good idea for nations to co-operate in setting health standards to govern trade in foodstuffs, or safety standards for cars. But it would be a bad idea for them to co-operate in determining which country will be allowed to sell which food and which car products, and at what prices.
Which brings us back to currency wars. Nations try to lower their exchange rate when they think that by devaluing their currency they make their goods cheaper in foreign markets. That, they reason, will encourage exports and spur economic and job growth. And they are right—until their trading partners retaliate, or the cheaper currency drives up the cost of imports, hitting consumers in their pockets. As one British merchant told me last week, if the cheap pound means he can sell more to foreigners, he won’t complain about paying more for imported cheese and wine. The teacher who has nothing to sell, but likes a bit of imported cheese and wine, might see devaluation a bit differently.