The Economist UK - 27.07.2019

60 Finance & economics The EconomistJuly 27th 2019

2 domestic demand, as it did during the fi-

nancial crisis, by encouraging businesses

and households to save rather than spend.

In Germany, industrial weakness is

starting to be felt in the labour market. Sec-

ond-quarter profits at basf, the world’s

largest chemicals firm, were down by 47%

compared with a year earlier. The company

plans to cut costs and jobs. According to the

Ifo Institute for Economic Research in Mu-

nich, the number of manufacturers plan-

ning to introduce short-time working over

the next three months is expected to reach

its highest level since 2013. That weakness

could spread: research by Jean Imbs of New

York University Abu Dhabi and Laurent

Pauwels of the University of Sydney Busi-

ness School, presented at the European

Central Bank’s annual conference in June,

finds that services are ever more integrated

across European countries. The bank’s staff

expect geopolitical tensions to weigh on

investment.

The central bank, which was due to hold

its monetary-policy meeting on July 25th

as The Economistwent to press, is expected

to indicate further policy loosening. Even

if fears of a trade war fade, it expects do-

mestic demand to lose some of its lustre.

Much of Spain’s sparkle, for example, re-

flects pent-up demand following its deep

crisis, which will level off as the economy

nears capacity and job creation slows. And

yet, by the central bank’s projections, that

recovery is not enough to return euro-zone

inflation to its target of “close to, but be-

low” 2%. More stimulus will be needed if

the bright spots are not to go out. 7

Euro area

Sunny side up

Source: Eurostat *Since 2007. Excluding Slovakia

GDP, cumulative increase,Q4 2017-Q1 2019, %

Gross value-added, by sector

Cumulative % change, Q4 2017-Q1 2019

Euro area

% of euro

area’s GDP

1

11

22

21

28

15

012345

Newer

members*

Spain

Others

France

Germany

Italy

2017 18 19

-1

0

1

2

3

4

5

To t a l

Manufacturing

Construction

Wholesale and retail trade

Professional services

T

he southern shrimp alliance, an in-

dustry association based in Florida, is

angling for tariffs. It has tried repeatedly to

have foreign competitors harpooned with

duties. Now some new opportunities have

surfaced. The Department of Commerce is

proposing a rule enabling tariffs on im-

ports from currency manipulators. Crusta-

cean-catchers are keen.

American businesses disgruntled by

what they see as distorted exchange rates

may soon have more weapons at hand.

After weeks of fulmination by President

Donald Trump on Twitter about countries

that keep their currencies artificially weak

to America’s detriment, financial analysts

are speculating that the Treasury might use

its Exchange Stabilisation Fund (esf) to

weaken the dollar. Elizabeth Warren, a

Democratic presidential hopeful, has also

called for the dollar to be managed to pro-

mote exports, referring to proposals by

Fred Bergsten and Joseph Gagnon of the Pe-

terson Institute for International Econom-

ics, a think-tank.

The chatter is odd in one respect: other

countries’ currency manipulation does not

seem to be the reason for the dollar’s

strength. Although an imf report pub-

lished on July 17th said that the dollar was

overvalued by 6-12%, it also said that for-

eign-exchange intervention had been play-

ing “a much more muted role in recent

years”. America’s loose fiscal policy—and

the tighter stance of countries like Ger-

many and the Netherlands—are more obvi-

ous culprits.

However misdirected the current ire,

the multilateral system for restraining cur-

rency manipulation is indeed toothless. In

2007 the imfrefrained from declaring Chi-

na a currency cheat, although it was run-

ning a current-account surplus of 10% of

gdp and buying around $2bn in dollar-de-

nominated assets each business day. Pre-

paring for a future bout of competitive de-

valuation might not be a bad idea.

But the proposals floating around

Washington would be ripe for abuse. The

Commerce Department’s would allow its

officials to declare a country a manipulator

even if the Treasury had not. Companies

seeking an unfair edge over foreign com-

petitors would no doubt lobby hard.

The measures suggested by Mr Bergsten

and Mr Gagnon would grant Mr Trump

huge financial firepower—dangerous, giv-

en his penchant for using whatever weap-

on is to hand to fight his trade wars. They

think the Treasury should be allowed to use

the esfto neutralise currency intervention

by other countries with equal and opposite

purchases, thus deterring the intervention

in the first place. But to be credible it would

need hundreds of billions of dollars at its

disposal. Its current portfolio is around

$95bn, of which $23bn is in dollars.

Moreover, unilateral action might lead

other central banks to retaliate. Mark Sobel,

a former Treasury official who managed

the esf, worries that a currency conflict

might even push the dollar up, if investors

scurried for safety into dollar-denominat-

ed assets. Stephen Englander of Standard

Chartered, a bank, warns American policy-

makers to “think about how you’re going to

feel the morning after”. Intervention

means buying unpopular currencies. Mr

Bergsten and Mr Gagnon argue that their

scheme could make the Treasury money as

undervalued currencies rise. But negative

yields on European and Japanese debt

make losses at least as plausible.

One more reason for caution is the po-

tential for further harming an already-frag-

ile multilateral system. Previous American

administrations considered tariffs on im-

ports from countries manipulating their

currencies, arguing that an artificially

weak exchange rate amounted to an export

subsidy. But they held back, understanding

that such action would break the World

Trade Organisation’s rules. A reversal

would invite legal challenge, and perhaps

retaliatory tariffs. The bellicose Mr Trump,

however, would be unlikely to mind. 7

WASHINGTON, DC

Defences against competitive devaluation could backfire

Currency manipulation

Fishing expedition

Alternating currency

Source: IMF

IMF estimates of real effective exchange rate

under/over-valuation, 2018, %

-15 -10 -5 0 5 10 15

United States

Canada

India

China

Japan

Euro area

Mexico

Argentina

Undervalued Overvalued

Range