It is difficult for countries to manage their macroeconomic policies to promote economic growth in today’s challenging global environment of slow growth, regardless whether the countries are in Asia, the eurozone or Latin America.
This especially applies to countries like China, Japan, Germany and Brazil, among others who keep seeking a macroeconomic policy that brings results.
These countries share more than one economic woe, which may include high public-debt-to-gross domestic product ratio, high budget deficit-to-GDP ratio, deflationary spiral, near-zero interest rate among other things and they endeavor to find the appropriate macroeconomic policy to address the woes.
But for certain countries, the options are limited. For example, the 2012 CIA World Factbook shows that the public-debt-to GDP ratio for Japan is about 250 percent, the U.S. is about 73 percent, United Kingdom is 90 percent, Italy is 126 percent, France is 90 percent, Canada is 84 percent and Brazil is 55 percent.
For Japan, the stimulus fiscal policy option is thus non-sustainable or too hard to use as it will bring the wrath of the so called bond vigilantes.
As countries, including the United States, realize that they have put their fiscal policies out of commission and also face the zero interest rate lower bonds, they have opted for nonconventional monetary policy, which is also known as quantitative easing.
It took the United States six years to pass this stage but Japan has been working on it for more than two years without success. Now Japan has to find a more successful policy. It seems now that it has opted for currency devaluation. This option, if successful, should increase exports and reduce imports, thereby leading to higher economic growth.
China is also moving away from fiscal policy and quantitative easing towards currency devaluation to stimulate exports and economic growth. This country had experienced a credit boom and a real estate bubble, which makes QE more difficult as it will increase financial risks in the country. In fact, China has already devaluated its yuan against the U.S. dollar and the trend is downward.
In the eurozone, the European Central Bank has been tanking the euro against both the U.S. dollar and the yen because this option is politically feasible. It has succeeded to weaken the euro against the dollar but could not produce economic growth or arrest the deflationary pressure.
Now the eurozone has officially entered the deflation zone. It is likely that the ECB will try QE next. But this policy option faces opposition from Germany, which is very fearful of inflation. Therefore, the ECB will have to take more aggressive steps to devalue the euro but this policy will increase credit risk in the eurozone.
All in all, competitive currency evaluation and beggar-thy-neighbor policy is the only remaining viable policy. The problem with this policy is that it does not produce benefits if many countries devalue their currencies at the same time as those countries cannot exceed their exports at the expense of their competitors.
Eventually, it will increase protectionism in international trade and lower global economic growth as trade is a source of economic growth. Drastic currency devaluations will also increase global systematic risk, giving rise to greater global financial instability.
The United States, which is the only major country whose economy is doing well, will not look kindly at competitive currency devaluations by other countries. Weaker foreign currencies and stronger dollar will hurt U.S. exports and chip some percentage points from its GDP. The U.S. will also be forced to talk down its dollar.
What should be done? Since the problem is global, it cannot be resolved at the national level, regardless how large and strong the country who wants to embark on such policy. The issue must be addressed at the multilateral level and not at the national level.
But those who work with the United Nations or the World Trade Organization know how hard to pass any multinational actions. Luckily, the world has already a multinational framework in place that can be used to address the problem. This framework is the G-20 countries.
The G-20 summit is now the premiere forum for international economic cooperation and decision-making among the world’s major 20 economies. In the upcoming summit, the G-20 leaders can stress the importance of coordinated growth strategies of structural reforms and stimulus policies and not through competitive currency devaluation tactics.
Shawkat Hammoudeh is an economics professor at Drexel University. He can be contacted at [email protected].