Draghi Seeks to Quiet Talk About Global Currency War

BRUSSELS — The president of the European Central Bank sought Monday to ease fears that countries including Japan were deliberately weakening their currencies and that European exporters were threatened by a round of competitive devaluations among the world’s major economies.

The comments by Mario Draghi appeared to show how some of the world’s most senior economic policy makers were continuing to grapple with the prospect of a “currency war,” even after finance ministers from the Group of 20 pledged over the weekend to refrain from devaluing their currencies to gain a competitive advantage in global trade.

During an afternoon of scheduled testimony before the European Parliament’s Economic and Finance Committee in Brussels, Mr. Draghi noted that the euro’s current exchange rate was close to its long-term average. He advised officials not to make alarmist comments.

“Most of the exchange rate movements that we have seen were not explicitly targeted; they were the result of domestic macroeconomic policies meant to boost the economy,” Mr. Draghi told the committee, without mentioning any countries by name. “In this sense, I find really excessive any language referring to currency wars.”

But Mr. Draghi also seemed to suggest that central banks could succumb to mutual suspicion about whether they were deliberately seeking to set exchange rates. “The less we talk about this, the better it is,” he said.

Underscoring the point, Mr. Draghi said he had “urged all parties” to exercise “very, very strong verbal discipline” at the G-20 finance ministers’ meeting in Moscow over the weekend.

The euro hit a record of ¥127.18 on Feb. 2, up from ¥114.48 at the start of the year. It stood at just ¥94.31 in July 2012. The euro traded at ¥125.46 on Monday, up slightly, and was flat against the dollar, at $1.3352.

Since the rapid strengthening of the euro against the yen and other major currencies, there has been a concerted push by industrialized nations to convey the message that they will let the markets determine the value of their currencies.

Last week the Group of 7 sought to quell fears of a developing currency war. Then, over the weekend, the G-20 finance ministers issued a statement saying they had concluded that loose monetary policy, including steps to weaken currencies, were acceptable if used as a means to stimulate domestic growth. But they also warned that such policies should not be used to benefit a country’s position in global trade.

Guntram B. Wolff, the deputy director of Bruegel, a research organization, said that he believed Japan’s central bank policy makers were carrying out an expansionary monetary policy in an appropriate way — as a means to spur economic growth, not as a way to aid Japanese exporters.

Instead, Mr. Wolff said, Mr. Draghi might be concerned about the U.S. Federal Reserve, where policy makers are considering continuing their expansionist monetary policy until the unemployment rate falls significantly, and about the Bank of England, which may end up pursuing similar policies as it revises the way it sets goals for economic growth.

“The bigger question is what central banks in the developed world are doing — I’m thinking here about the Bank of England and the Federal Reserve — and whether we have a danger of competitive devaluation,” Mr. Wolff said. “While we claim that all of this is done for domestic purposes, the internal and external goal can become the same, and then you have the risk that this turns toxic.”

A loose monetary policy intended to spur growth often has the effect of devaluing a currency, making a country’s exports more affordable and its competitors’ exports more expensive. For example, a strong euro means that exports like cars and wines become more expensive abroad. That puts European producers at a disadvantage in competing with foreign producers on world markets.

Yet a strong euro also brings some advantages for Europe. Certain imports — like energy, in the form of oil and natural gas — become more affordable.

Over the past few years, emerging-market countries like Brazil have openly accused slow-growing advanced countries like the United States of unfairly pushing down the value of their currencies with their aggressive monetary policies. And, for years, the United States has accused export-reliant emerging economies, in particular China, of manipulating their currencies, too.

More recently, in Japan, stimulus programs backed by the newly elected prime minister, Shinzo Abe, have kept interest rates near zero and flooded the economy with money, which has reduced the cost of Japanese products around the world.

In Europe, while confidence has grown that the Union will be able to manage its sovereign debt crisis, the euro has made significant gains against the dollar and other currencies. That is making European exports more expensive, a factor that could hamper growth.

The gains have prompted François Hollande, the president of France — which has traditionally taken a more interventionist stance in economic matters — to call for a European exchange-rate policy.

Mr. Draghi did allow that the relative strength of the euro “is important for growth and price stability” and that “to the downside,” an “appreciation of the euro is a risk.” He said the E.C.B. would assess whether the exchange rate was having an effect on inflation.

But for now, Mr. Hollande has very little traction on the issue. Jeroen Dijsselbloem, the newly appointed president of the Eurogroup of euro zone finance ministers, gave the French request short shrift this month, and a senior German official has decried the French initiative as a poor substitute for policy overhauls.

“Can you have a managed exchange rate in Europe?” asked Karel Lannoo, the chief executive of the Center for European Policy Studies, a research organization in Brussels. “Probably not, when you consider how hard it would be to agree on a rate and the means to maintain it. ”

Article source: http://www.nytimes.com/2013/02/19/business/global/draghi-seeks-to-quiet-talk-about-global-currency-war.html?partner=rss&emc=rss