A country that dismisses its pride in a stable currency and opts for devaluation does its exporters a huge favor. But when everyone else follows suit, currency wars quickly become trade wars, says DW's Henrik Böhme.
Two words are making the rounds again, two very bad words. I'm talking about "currency war," a term that comes from a dark chapter in the history of the global economy.
It was the early 1930s. Important trade nations were purposefully manipulating their currencies downwards to protect them from being infected by the Great Depression in the US. They thought, why not make their own wares cheaper to help exporters sell them more easily abroad?
But there was just one problem: Every country only had itself in mind. That selfishness eventually dragged down everyone into an era of global economic depression. The consequences are well known.
If you live in a glass house...
Today, that kind of egocentric thinking won't get you very far in a global economy that is much more interdependent than it was eight decades ago.
After the crash of Lehman Brothers, when the world's financial markets again found themselves on the precipice of a complete meltdown, the leaders of the biggest global economies got together and tried to prevent the unthinkable from happening.
It worked reasonably well, too, but there were casualities. For one, there's not much left of the cohesion that once bonded the crisis' main combatants, namely the G20 nations. Today it's every man for himself.
Yet everyone seems to be living in a glass house next to a pile of stones.
Let he who is without sin...
That hasn't stopped anyone from using the words "currency war." Take the case of China's central bank, for instance: For a week, it artificially reduced the value of the renminbi.
Such a move isn't new (see above). In fact, it is something that goes on on at regular intervals around the world. It happened in autumn of 2010, with Brazil's incumbent finance minister warning of such currency wars - although under different conditions. His country's currency was continually rising in value against the dollar and his warning was aimed at the US Federal Reserve, which was doing everything in its power to keep the dollar as weak as possible.
Why? That's right - to promote the exports of American companies.
Someone's bound to get hurt
Two years later, it was Japan's turn. The country flooded the markets with yens to weaken its currency. South Korea suffered the worst due to a similar export structure.
But the most recent example is the European Central Bank. Its massive bond-buying program is primarily aimed at stimulating inflation - a feat best accomplished with a weak currency. Its efforts to bring down the currency's value have been massively successful, too - at the expense of some countries outside the euro, notably Switzerland, which has been suffering under the weight of its strong franc.
Such is life inside a glass house. Someone always gets hurt.
From bad to worse
So goes the old adage: Don't throw stones if you live in a glass house. But that's exactly what happens when everyone tries to keep their economies alive by loosening monetary policy.
National currencies and interest rates are the stones. Flooding markets with one country's money and lowering rates to near zero is the equivalent of throwing those stones.
If everyone resorts to the same tactic, then the desired effect fizzles after a very short time. Eventually beleaguered countries will turn to other measures and seal off their markets. Thus, a currency war quickly becomes a trade war.
Kicking the habit
It's like a drug. The second an addict (in this case, a country's economy) gets put into rehab (for instance, introducing the prospect of higher interest rates), painful withdrawal symptoms begin.
There has to be another way. The most important players - the G20, for one - must agree on a common strategy and coordinate their monetary policies. Currency wars can have no victors. They simply increase the likelihood of new global financial crises. Has the world learned nothing from Lehman Brothers?
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