Europe drawn into global currency wars

By Ambrose Evans-Pritchard

Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer willing to be the last economic player holding the toxic parcel of an over-valued exchange rate, describing the euro as “dangerously high” after its three-month surge against the dollar, yuan and yen.

The comments follow warnings by two French ministers this month that the strong euro is holding back efforts to pull the France out of deep industrial slump.

Alexei Ulyukayev, deputy head of Russia’s central bank, said the tilt in EMU policy marks a new escalation as every major bloc of the global economy tries to drive down its exchange rate at the same time. “We are now on the threshold of very serious currency wars,” he said.

Korea has asked the G20 take a stand against beggar-thy-neighbour policies in Moscow next month, accusing Japan and the West of covert debasement through loose money.

Japan’s premier Shinzo Abe kicked off the latest skirmishes by threatening to change the Bank of Japan’s statute unless it agrees to launch a monetary blitz and weaken the yen. The euro has rocketed by 20pc against the yen since July. “This will soon start to hurt core Euroland and Germany. The Japanese compete in the same export niche of cars, machine tools and electronics,” said Hans Redeker from Morgan Stanley.

He warned that European banks are still repatriating funds as they cut foreign assets to meet tougher capital rules, pushing the euro higher. Global central banks - especially in Asia - are also stepping back into the EMU debt market after a buyers strike last year.

This is a double-edged effect. While they help cap bond yields, they are also capping their own currencies against the euro. Mr Redeker expects the euro to punch yet higher early this year before buckling and crashing to $1.08 by 2014.

Julian Callow from Barclays said the trade-weighted euro has risen 6pc since the third quarter of 2012. If sustained, this will lop around 0.4pc off eurozone GDP this year at a time when the economy is already contracting. The jobless rate has reached a record 11.8pc, rising to 26.6pc in Spain.

The ECB has so far refused to take action to curb euro strength, standing aloof as Japan, the US, Britain, Switzerland, Norway, New Zealand and Korea itself, among others, try to steer their currencies lower.

Austria’s ECB governor Ewald Nowotny said on Wednesday that euro strength is “not a matter of major concern”. The ECB’s president Mario Draghi brushed aside concerns last week, insisting that “both the real and the effective exchange rate of the euro are at their long-term average”.

The historical rate may mean little after years of intra-EMU divergence. A study by Morgan Stanley found that the “fair” rate for the euro is $1.53 for Germany, $1.23 for Holland, $1.19 for Italy and $1.06 for Greece.

The Lisbon Treaty gives EU finance ministers the crucial say over the exchange rate. The "Ecofin" council can fix the euro against other currencies by unanimous vote, and can shape a "dirty float" by a qualified majority vote. Any such ruling by the council would compel the ECB to shift policy.

Pressure for action is mounting as the slump deepens. A string of countries have downgraded their forecasts over recent days. Portugal’s central bank expects contraction of 1.9pc this year. The Netherlands said Dutch GDP will fall 0.5pc. Germany slashed its forecast from 1pc to 0.4pc.

As often in EU affairs, France is the pivotal state, with the heft to build a coalition. The country has been been losing global export share at an alarming since EMU began, shedding 100,000 industrial jobs a year. This has finally set off a protectionist backlash. Industry minister Arnaud Montebourg said last week that multilateral trade deals are “dead” and slammed predatory practices by China.

Adam Posen, a former UK rate-setter and now at Washinton’s Peterson Insititute, said there could be a chain-reaction this year as the dam breaks and each country resorts to "sauve qui peut" policies.

The underlying problem is a global saving glut as the world saving rate hits a record 24pc of GDP, chiefly driven by Asia and aging effects. Trade experts say the international system cannot return to healthy balance until excess capacity in global industry is whittled away. Telegraph