The fuse of the currency war was lit by Shinzo Abe, the new Japanese premier. “But the match is now in the hands of Europe” comments Professor Mario Noera, Bocconi lecturer in law and economics of financial markets. His thesis is that the so-called "Abenomics", an extreme expression of Keynesianism, is destined to have profound effects on the guidelines of global economic policy, now in its sixth year of the great crisis.
So far, however, the risks of this expansive turn have been underlined. The danger is that relations between currencies will destabilize and the trade war will unleash. It already happened in the thirties…
I agree that we are crossing a terra incognita, where there is no shortage of question marks. The most disturbing aspect concerns the amount of Tokyo's public debt: an expansive policy based on such a fragile public finance can lead to a competitive devaluation.
With the risk of activating protectionist reactions. Or not?
It's not for sure. In fact, I don't think this is the most probable reaction, as demonstrated by the Chinese commercial dumping that has been going on for about ten years. The risks, however, are there. But in my opinion the positive effects of the Japanese turnaround prevail.
What positive effects?
First of all, bring out the mother of all problems: the latent currency instability between the various economic areas to which no answers have been given for ten years now. Until 2007 there was discussion, without concrete solutions, of the Chinese trade surplus, and of the undervaluation of the yuan which was at its origin. Then, after the outbreak of the subprime crisis, one of the consequences of the continuation of low rates linked to currency imbalances, the issue faded into the background. A mistake, because rates are the true thermometer that must be taken into account in order to face the crisis with a new attitude”.
Or?
In other words, the Japanese move overturns the table of unanimous consensus on the macroeconomic theories that have dominated the debate over the last thirty years. The fact that emerges is that the building based only on liberalization, globalization without constraints, the opening of the borders of the WTO to China without first demanding a rebalancing in key matters for competition, has reached an extreme point.
In what sense is the exchange rate the thermometer of this crisis?
In the current framework, the old economic policy, based on national recipes, is no longer effective. There are only two ways to rebalance the accounts: 1) an expansive policy which inevitably affects the exchange rate; 2) or, if you give up the gear lever, you just have to rely on the weapon of internal deflation.
It is a crossroads well known to us Italians.
But that doesn't just apply to us. The tug-of-war in the US over the federal budget reflects a similar confrontation which is not on accounting accounts but between different visions of the world. In this context, I find the news coming from Japan, a country that has lived the paradigm of stagnation for thirty years, positive. All taboos were swept away in one fell swoop: the excessive public debt, the exchange rate constraint, the inflation target. At the top of the agenda is the need to return to growth.
And will he succeed?
"I do not believe. Also because, so far, the focus has been on a strong announcement effect, but the real interventions will not begin before 2014. But what I would like to emphasize is that finally we are back to talking about how to reactivate the engine of growth. It is not a task for just one country, but requires a strong international initiative: there are countries that need to get domestic demand back on track, others need to put themselves in a position to export. And the change must reflect the new balances.
Something that in Europe cannot happen under a single currency regime. Or not?
In Europe the same mechanisms of global confrontation are reproduced; once the weapon of exchange has been renounced as an instrument for rebalancing the trade surplus, it is necessary to activate other coordination instruments, those which it is difficult, with too much effort, to bring out in Brussels.
In the meantime, all that remains is the weapon of internal deflation...
Of which we are suffering a little all the harmful effects. I believe that it is difficult, along this road, for Italy to be able to recover the 30% of competitiveness lost in relation to Germany. Meanwhile, the social costs become increasingly unmanageable. And the results are increasingly modest given that debt, despite austerity, is growing in relation to GDP. Not to mention the cost associated with the enormous reduction in production capacity.
In short, an injection of sushi economy in Europe might not hurt…
I think that if you want to save the Union, some reflection on the matter should be done. Let us not forget that, until a few weeks ago, Europe was talking about the risk of falling into a Japanese syndrome. The positive aspect is that, after what the chief economist of the Monetary Fund, Olivier Blanchard, already a great theorist of austerity, has said, it is very positive that we are moving from an academic comparison to more concrete terrain. Also because at the end of 2013, after the German elections, the turning point could be ripe. Or, perhaps, it could be imposed by the evolution of the other big players in the world economy.
