ECB Stimulus

A Growing War of Currencies

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A special price for you, thanks to Mr. Draghi.
  • Why it matters

    Why it matters

    The ECB’s ultra-loose monetary policy is a risk to economic growth in the euro zone and the world in the long run.

  • Facts


    • ECB President Mario Draghi plans to revive the euro zone economy by purchasing securities worth at least €1.1 trillion ($1.22 trillion).
    • Fifteen central banks around the world have relaxed their monetary policy since the beginning of the year.
    • On Thursday, the value of the euro fell to nearly $1.10, its lowest level since 2003.
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Mario Draghi, the president of the European Central Bank, will not be lacking in justifications for his revolution in monetary policy, when he presents details of the massive government bond-buying program on Thursday after a meeting of the bank’s governing council.

Europe’s economy is still very fragile. The inflation rate in the 19 countries making up the euro currency zone stood most recently at negative 0.3 percent, a long way from the ECB’s declared target of inflation just under 2 percent. Bank lending remains at a standstill in most southern European countries, and there is no evidence of a sustained recovery in Europe.

This is why Mr. Draghi can rest assured that a majority within Europe will support his plan to revive the economy by purchasing securities worth at least €1.14 trillion ($1.22 trillion), a plan known as quantitative easing that has already been carried out in the United States, Britain and Europe.

The announcement has also led to a sharp drop in the value of the euro against a range of other currencies. But it would seem that Mr. Draghi has little interest in the effects of this “quantitative easing” outside the currency zone.

In fact, the consequences are tremendous, as evidenced by the intense reactions of other central banks outside the euro zone since the ECB announced its program in January.

A total of 15 central banks have relaxed their monetary policy since the beginning of the year, mostly to stimulate economy growth in their respective countries.

In the wake of the monetary policy offensive in Frankfurt, the Swiss National Bank felt compelled to abandon the franc’s minimum exchange rate against the euro, in place since 2011, and drastically lower interest rates.

The Danish and Swedish central banks are also doing everything in their power to fend off the impending flood of new money from the euro zone – by zero interest rates, negative interest on deposit accounts with banks and, to some extent, the purchase of securities. The matter is hardest for Denmark, which has long pegged its currency to the euro even though it is not a member of the club.

A new wave of easing of monetary policy is rolling across other continents, too.

A total of 15 central banks have relaxed their monetary policy since the beginning of the year, mostly to stimulate economic growth in their respective countries, but also to hold down the value of their currencies.

India surprisingly cut its interest rates on Wednesday for the second time since the beginning of the year. China did the same thing in the last three months – also twice. In Japan, South Korea, Indonesia, Turkey, Canada and Australia, monetary policy is also being used to depress the exchange rate.

In fact, 2015 was supposed to be the year of initial steps toward normalization of monetary policy – led by the U.S. central bank, the Federal Reserve.

But even the most powerful of all central banks, which had intended to raise interest rates in the spring, is currently doing everything possible to find reasons to postpone the move for as long as possible.

The central bankers’ aim is clear. Even in the eighth year since the global financial crisis began, economic growth is still occurring in very small doses. Traditional channels for stimulating growth, such as through increased lending, aren’t working because banks and many companies are still paying off debts. This is why central banks are targeting the exchange rate in the fight over any remaining potential for growth.

Mr. Draghi is taking the same approach: The weaker the currency, the cheaper are European products in the global market place. The ECB chief officially denies that he is deliberately trying to weaken the euro.

“The exchange rate is not an ECB policy target, even if the exchange rate is important for price stability and growth,” Mr. Draghi told Handelsblatt back in January. The weak euro is “a natural outcome of diverging monetary policy paths in the US and the euro area. Markets expect a less accommodative monetary policy in the United States. This contributes to a stronger dollar,” he added.

The trouble is that hardly anyone in financial markets really believes him anymore.

Nick Matthews, an economist with the Japanese brokerage firm Nomura Securities, said the exchange rate is clearly a channel used by the ECB to measure its effectiveness.

A look at the currency market shows just how effective the tool can be. On Thursday, the euro declined against the dollar to the lowest level since 2003, barely staying above the mark of $1.10 per euro. The currency has lost more than 20 percent of its value against the greenback in the last 12 months.

Janet Yellen chair US Federal Reserve Mario Draghi president ECB European Central Bank Source Bloomberg Aug 2014 38803569
The U.S. Federal Reserve, led by Janet Yellen seen right, has postponed raising interest rates. Mario Draghi of the ECB, has embarked on an new bond-buying program for the euro zone. Source: Bloomberg


The example of Turkey shows that the decision by central banks to ease aggressively is not always entirely voluntary.

When the Turkish central bank reduced its base rate in late February, President Recep Tayyip Erdogan quickly spoke up and condemned his country’s monetary policy for still being too strict – he wanted a stronger cut in interest rates. Although the Turkish central bank is formally independent, it is subject to massive political pressure.

The governments in Japan, Indonesia, South Korea and India also exert gentle pressure on their central banks. Even in Europe, many politicians have repeatedly called on the ECB to do more to promote growth. A number of policymakers in Germany, where the approach is more cautious, have opposed quantitative easing and pleaded with the central bank to take its foot off the gas pedal.

Capitalism critic Joseph Vogl, a professor of German literature, cultural and media studies at Berlin’s Humboldt University, already sees central banks as a “fourth power” within the state – and one without democratic control.

A global, uncoordinated race to devalue currencies is underway. Bill Gross, a globally renowned portfolio manager now at Janus Capital, calls it an “undeclared currency war,” in which central banks are stumbling around like sleepwalkers.

The times when the Bundesbank, Germany’s central bank, still viewed a strong currency as evidence of the success of its monetary policy are long gone. Last year’s warning by India’s central bank governor, Raghuram Rajan, who had called for improved coordination of international monetary policy, fell upon deaf ears.

This is all the more astonishing, as the world’s most important central bankers meet regularly at the Bank for International Settlements, or BIS, in Basel, Switzerland, to exchange ideas. But when it comes to the economic wellbeing of their own countries, it’s every man for himself, even if they all stand to lose in a worldwide currency devaluation race.

To be on the safe side, U.S. Treasury Secretary Jack Lew has already warned that the United States will defend itself in a race over exchange rates.

“If everyone is playing the same game, there will be more and bigger fluctuations in the currency markets,” warned David Woo, an analyst with Bank of America Merrill Lynch.

Statements issued by the G20, made up of the world’s 20 leading finance ministers and central bank heads, shows just how grotesque the situation is. At their February meeting in Istanbul, they continued to condemn a devaluation race. At the same time, the attendees on the sidelines said they relaxed monetary policy was welcomed if it served domestic economic goals.

Officials at the BIS note they are powerless even as they witness the egoistic behavior of central banks. “We merely offer a forum for discussion. Every central bank sets its own policies,” said an official with the Basel institution.

In fact, the BIS had long warned against the dangers of an uncontrolled glut of money. In its 2013-2014 annual report published last June, it wrote: “The risk is that, over time, monetary policy loses traction while its side effects proliferate.”

The exchange rate has become the most important instrument of monetary policy, admitted one central banker who chose to remain anonymous.

Most central banks, he explained, have exhausted their conventional measures to meet their goals. The Bank of Japan and the ECB, in particular, are now stepping on the gas. The risk, said the central banker, is that the devaluation of a country’s currency will come in place of necessary structural reforms.

Whether the central bankers’ plans to overcome the economic downturn – each at the expense of other countries – succeeds in the long term is more than questionable. It is also questionable whether a weak currency is truly advantageous for an economy.

Thomas Mayer, the former Deutsche Bank chief economist and now head of Cologne-based wealth management firm Flossbach von Storch, believes this theory is the greatest economic fallacy of recent years. A weak currency provides short-term relief at best, and it benefits only a small portion of the entire economy, namely the export sector.

“A strong currency is in an economy’s best interest in the long term,” Mr. Mayer said.

There is a second reason why a devaluation strategy is quickly stretched to its limits: It only works for as long as the trading partners cooperate. But even the powerful Fed made it clear early this year that the timing of its decision to raise interest rates would also depend on “international developments.”

In other words, if the dollar becomes too strong, the Fed’s interest rate increases will have to wait. The U.S. Congress is already discussing proposals to respond to currency manipulations by key trading partners with retaliatory measures.

U.S. Treasury Secretary Jack Lew has so far resisted, arguing that on balance the United States benefits from the positive growth effects from monetary policy in other countries. To be on the safe side, however, he has already warned that the United States will defend itself in a race over exchange rates.

If the U.S. gets involved, then the clandestine devaluation race could turn into an open currency war, to the detriment of all parties involved.


Jens Münchrath leads Handelsblatt’s coverage of economics and monetary policy and has been with the newspaper since 2013. Torsten Riecke is Handelsblatt’s international correspondent, reporting on international finance and economic topics. To contact the authors: and

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