Currency wars may be all the rage but they are merely a symptom of a much more deep-rooted problem. We are witnessing the return of economic nationalism. At the 2009 London Group of 20 summit, it seemed for a fleeting moment that nations had learnt how to work together to solve the world’s economic and financial problems. That dream no longer holds. Persistent economic stagnation has left our political leaders increasingly looking for national solutions to what have become deeply-entrenched international problems.
Their approach is hardly surprising. Politicians are accountable more to their own electorates – and their local media – than to anyone else. In the good old days, when globalisation appeared to deliver rising living standards for all, there was no conflict: our leaders could simultaneously support the architecture of globalisation while taking the plaudits for prosperity at home. That’s all changed. While globalisation has most certainly dragged millions of Chinese and Indians out of poverty and turned rich westerners into the super-rich, that is scant consolation for those millions of western citizens heavily in debt and without a pay rise for many years.
It is not so much that nations are becoming deliberately more protectionist. Rather, the cheerleaders for globalisation have gone into hiding. They can no longer so easily claim that the forces of internationalisation have brought benefits to all. Without those cheerleaders, however, the temptation to pursue economic nationalism becomes ever greater.
Economic nationalism, however, is riddled with contradictions. It might make sense for policy makers in one country alone to pursue currency devaluation, particularly if the evidence suggests a currency is significantly overvalued. But it cannot make sense for many countries to pursue devaluation policies all at the same time: they cannot all, simultaneously, have overvalued exchange rates. Similarly, it might seem reasonable for those countries with low levels of debt and “healthy” balance of payments positions to demand that others follow in their footsteps yet it simply is not possible for all nations to run current account surpluses, despite the wistful hopes of economic conservatives in Germany.
We cannot help but live in an interconnected world. Those connections, for good or bad, shape all our economic destinies. Economic nationalism, in effect, ignores those connections. It pretends that countries can be masters of their own destinies, marching to their own beat even as other nations head off in entirely different directions. It is, in truth, no more than a populist fiction: the ups and downs of the economic cycle in any one country are closely attuned to similar movements elsewhere; the success of currency devaluations depends on both the willingness of foreigners to buy bargain-basement exports and the extent of any increase in domestic inflation thanks to higher import prices; the benefits of quantitative easing will be attenuated if it leads to significantly higher commodity prices; and attempts to raise taxes to bring budget deficits under control may simply lead to an exodus of talent from, say, Paris to London.
Mohamed El-Erian is absolutely right to warn of the dangers to the eurozone associated with the easy monetary policies pursued elsewhere in the world. If the Japanese succeed in delivering a weaker yen, if the Americans continue to print money in an attempt to bring their unemployment rate well below 7 per cent and if a Mark Carney-led Bank of England pursues a new growth-friendly strategy with an air of relaxed detachment about price stability in the short term, the danger is that all the good work achieved by Mario Draghi in stabilising the eurozone monetary system last year will unravel. Labour costs in southern Europe are still too high; a much stronger euro will only serve to crush hopes of an eventual growth renaissance.
The consequences of such a failure would undoubtedly be painful. More than anything else, southern European countries need growth to enable them to soothe their fiscal positions. In the absence of growth, those fiscal positions will only get worse. Even with the contingent offer from the European Central Bank of outright monetary transactions, higher government debts would eventually trigger a crisis as much political as economic. For how long would the creditor nations of northern Europe be happy to support the uncontrollable debt trajectories of those in the south? And if support eventually waned, would the eurozone economy then, once again, be teetering on the brink of a recessionary abyss?
This danger reveals an underlying truth about economic nationalism. It too often leads not so much to faster growth but, instead, to an international redistribution of economic pain. We are witnessing a battle between the interests of international creditors and debtors. With levels of global output much lower than expected only a handful of years ago, creditors are incentivised to shift the burden of adjustment on to debtors, demanding painful austerity for those who have “sinned”. Debtors, meanwhile, are incentivised to pass the burden of adjustment on to creditors through currency devaluation, default and bailouts.
Faced with these competing incentives, it is no great surprise that we cannot return to the growth rates of old. Economic nationalism may offer near-term pain relief but, as a political response to economic failure, it only risks locking in that economic failure for the long term.
The writer is HSBC Group’s chief economist and the bank’s global head of economics and asset allocation research. His new book, ‘When the Money Runs Out: The End of Western Affluence’, is due to be published by Yale later this year