Monday, March 16, 2009

Swiss Devalue: More Currencies to Follow?

[IMAGE: Eat Money, 2007, waɪ.tiː, Attribution-Noncommercial-No Derivative Works 2.0 Generic]

Switzerland has been in the news a bit recently. It has devalued its currency; something which has a lot of economist-types raising eyebrows.

In the UK, there was a lot of furor recently when the pound collapsed against the euro. Elle and I, personally, saw the value of our savings affected. It's an emotive issue, especially for UK businesses that import from the EU, overseas students (like me!), and British tourists abroad. Philip Hammond, of the Conservative Party, was quick to attack the government for failing British holiday-makers: "Hundreds of thousands of Britons find themselves grounded as the pound falls below one euro in value."

Hammond, as shadow Chief Secretary to the Treasury, must have been aware that what he was saying, whilst technically accurate and resonating strongly with the public, wasn't the whole picture. Just as Gordon Brown knew he wasn't being entirely accurate when, as shadow Chancellor in the 1990's, he attacked the Conservative government by saying "a weak currency is a sign of a weak economy, which is the sign of a weak government."

Both men know that a weak currency is often advantageous to an economy, especially in the long-term. If your currency is weak it harms your import industries, whilst at the same time it strengthens your export industries (and if you have a relatively weak export sector, like the UK, it encourages export industries to develop). It now costs people in the UK more to buy European products, but it also costs Europeans less to buy British products, making British producers more competitive than their European counterparts. Traditionally, an emphasis on exports is seen as a good thing for an economy, as it means there is more money flowing in and less flowing out.

This is why there is some concern over the Swiss devaluation. There is a fear that this could spark a "currency war," as other economies all scramble to devalue and retain their competitive advantage. This happened during the Great Depression, when the international economy got caught in a spiral of devaluations, with each country engaged in a race to the bottom. It was one of the things the Bretton Woods institutions were designed to prevent.

The Russians have already devalued the ruble, and worried economists are now eyeing the Japanese yen (although analysts are also arguing that it is impossible for Japan to devalue the yen without negatively affect trade relations with the rest of the world).

This is certainly something to keep an eye on.

In other economic news, Professor Kevin O'Rourke of Trinity College, Dublin, has published a convincing article arguing why no national government is currently seriously considering leaving the euro as an option. The more I read about this, the more I'm being pursuaded that no member-states will voluntarily leave the Euro, and that EcoFin will not be ejecting member-states. This is obviously an issue of high interest, because this blog has been getting a lot of traffic from people curious about the possibility of eurozone break-up.

Finally, one other titbit: Switzerland is relaxing its banking secrecy rules. This deserves its own blog post, so I'm busy working on one and will upload soon.


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