By Anatole Kaletsky
Feb 14 Mirror, mirror on the wall, who's the weakest of them all? As G20 finance ministers warn of the threat of a "global currency war" at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.
The first is that every country's objective in this war is to "lose" by making its currency weaker. This is because a weak currency tends to support exports, employment and economic growth (if all other things are equal, which they never quite are). The second oddity is that the clear winner in this global currency war has not been Japan, Switzerland, China or any of the other usual suspects, but a country rarely accused of financial aggression: Britain.
Since the global financial crisis started in mid-2007, the pound sterling has been, by a wide margin, the weakest major currency. The Bank of England's trade-weighted sterling index fell by a record 30 percent in early 2009 and, despite a modest rebound in 2010-12, it remains 24 percent below its level of mid-2007. Japan, by contrast, has endured a rise in its trade-weighted exchange rate of 60 percent from July 2007 to late last year, when Prime Minister Shinzo Abe committed his new government to a more competitive rate. Japan is therefore fully entitled to resent other countries' accusations of currency warfare, when it has in fact been a long-suffering pacifist, exposing its export companies to the full burden of other countries' post-crisis currency adjustments.
But let us return to the biggest "winner" in the post-crisis currency wars, Britain. Sterling's devaluation has clearly been no panacea. Britain has done worse on most measures of economic performance since 2008 than any G7 country apart from Italy. That, however, may have been inevitable. London's dominant role in international finance made Britain more vulnerable than any other major economy to the greatest banking crisis in history. And once that was over, Prime Minister David Cameron imposed on his country the toughest budgetary austerity in the G7. Whether this policy was wise is an interesting question, discussed in several previous columns. A more important issue today is what may happen next to Britain.
Recent events in the foreign exchange market suggest a possible answer. Since the end of last year the pound has weakened dramatically against all other major currencies, apart from the yen. The British and Japanese currencies seem to be falling for similar reasons. Those countries' economies have experienced almost no growth since 2009, and their governments are becoming increasingly desperate to end this long-term stagnation.
As a result, both the Bank of England and the Bank of Japan are undergoing radical management changes. Previously unthinkable concepts in monetary and fiscal policy are suddenly open for debate, as demonstrated by Shinzo Abe's suggestions that the Bank of Japan's monetary expansion should directly finance record-breaking new public investment programs, and by the speech on "helicopter money" delivered by Adair Turner, chairman of Britain's Financial Services Authority last week. All these political and monetary upheavals are occurring in Britain and Japan just when political uncertainties are subsiding in the U.S., China and the euro zone.
Japan, of course, is used to policy uncertainty and political upheavals, having dealt with six prime ministers in the past five years. But for investors and businesses in Britain, the new unpredictability of politics and economic policy may come as a rude shock.
Starting with monetary policy, there are three reasons to expect Mark Carney, the next governor of the Bank of England, to experiment with new and potentially more aggressive versions of monetary policy when he takes over in July.
First, Carney, currently head of the Bank of Canada, has repeatedly said that monetary policy could do more for growth in Britain, in sharp contrast to Mervyn King, the present governor, who believes the effectiveness of monetary stimulus has been exhausted.
Second, Cameron presumably took the unprecedented decision to appoint a foreign citizen to the BoE for a reason, most likely to have the option of blaming the BoE ancien regime for the economy's disappointing performance. For such a charge to stick, the new BoE management would have to adopt a discernibly different monetary policy.
Finally, Carney himself is known to be interested in a political career in Canada. His chances of success would be greatly enhanced if he could return to Ottawa as the British economy's radical savior, not just an anonymous central banker.
Regarding fiscal policy, it is now almost impossible for the British government to hit its budgetary targets, and the political risks of imposing any further tax hikes or spending cuts are overwhelming as the election approaches. The path of fiscal policy is now more uncertain in Britain than in the U.S. or most of the euro zone - and most market analysts expect Britain to lose its triple-A credit rating sometime this year.
Finally, political uncertainty is bound to intensify in Britain, even as it subsides in the rest of Europe and the U.S. In the three years since Cameron's election in May 2010, Britain has had the most stable and predictable government in Europe. This will change as the election approaches, the present Conservative-Liberal coalition splinters and the many permutations of Conservative, Labour or coalition governments with their myriad of policy agendas come into view.
In short, Britain is in the process of transformation from a haven of political and economic stability into one of the world's most unpredictable economies. Small wonder, then, that the pound has again started falling after its modest rebound since 2010. That points to at least one consolation from all the new uncertainties: Britain could again become a quiet winner in the global weak-currency war.