According to wikipedia, Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry.
Ahead of G20 conference that will be hosted in the Republic of Korea, it seems that the leading agenda will be about the currency war, the state emerging markets and the stimulus packages by central banks of major economies. We have seen how Central Banks of the various countries in this world announce their stimulus package, the popular one being Ben. S. Bernanke announcing that he will purchase up to $600 Billion Dollars of the US treasuries within the next eight months. Economist from different parts of the world argues that Bernanke’s move can have a crippling effect on the emerging markets.
The outbreak of currency war in 2010 has not been warmly welcomed by many head of state. The president of South Africa Mr Jacob Zuma, commenting on the matter said “Leaders around the world must act to prevent the recent round of currency devaluations from turning into a global currency war. We must collectively find an effective solution in the short term.” (Timeslive,2010). It seems that the president is late in his warning because the currency war has already started.
The following are the crippling effect of currency war:
- It can lead to a reduction in citizen’s material standard of living.
- It can push up inflation.
- A strong currency is sometimes seen as a mark of prestige while devaluation is sometimes seen as a sign of a weak government.
- For countries such as South Africa, An escalating currency war could make exchange rates highly volatile, sparking protectionism and reducing global trade flows.
The truth of the matter is that the developed economies are pursuing economic policies such as buying bonds as a measure to heal their ailing economies. Sadly, they do that at the expense of the emerging markets.
The so called currency war is as a result of the effort to keep countries going, where each country tries to become competitive on the basis of the competitive currencies.
According to the South African Finance Minister Pravin Gordhan, currency war will lead to what he referred to as the trade war.
Currency war, the strength of the currency of the emerging markets and the fight against economic crisis are new interesting topics for economics majors, and those students who will be writing mini thesis in the coming academic year.
Let’s hope that the current G20 meeting will yield positive results. Will the global economy be healed? That is an agenda which must be looked at by global Finance Ministers, Head of State and the Cental Bank governors.
Source: Fin24.com, Sunday Times, and Wikepedia.