U.S. Treasury Report on International Economic and Foreign Exchange Policies

November 4, 2013

The semi-annual Treasury Department treatise on currency market conditions once again declared no country to be a “currency manipulation,” a designation that would enhance government powers to impose protectionist counter-actions.  As usual, the lack of any such formal designation did not stop Treasury officials from recommending policy adjustments and leveling criticism at the recent practices of a number of other governments. 

The harshest protest was not directed at China but rather Germany, accusing the the center-right government there of policies that depress domestic demand, stymie any reduction of the German current account surplus, weaken economic conditions in other parts of the Ezone, and encourage deflation both home and abroad.

To ease the adjustment process within the euro area, countries with large and persistent surplus need to take action to boost domestic demand growth and shrink their surpluses. Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered re-balancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy. Stronger domestic demand growth in surplus European economies, particularly in Germany, would help to facilitate a durable re-balancing of imbalances in the euro area.

Even if German officials were slightly inclined to listen and comply with Washington’s complaint, which they clearly aren’t, the National Security Agency’s spy-gate, including bugging German Chancellor’s phone for the past eleven years, makes the above request a non-starter of the highest order, and there’s no way that the Obama Administration would ever declare Germany or the euro area a currency manipulator.  It is what it is, however hurtful to the world economy.

Among other observations and highlights, the report estimates that the trade-weighted dollar had risen 2.1% over the first three quarters of 2013, but that in inflation-adjusted terms, it was 3.2% below its 20-year mean yet, according to the IMF, “mildly overvalued.”  South Korea authorities received mild criticism for intervening to limit won appreciation even as that economy’s large current account surplus continues to widen.  In contrast, the Swiss ceiling on franc appreciation against the euro was exonerated.  The report notes, “Switzerland is a small open economy surrounded by the euro area, and has been disproportionally affected by the financial stresses in Europe, resulting in disorderly movements in the exchange rate. The Swiss authorities faced a constrained policy environment as external forces pushed the economy into deflation and potentially recession in the summer of 2011. The exchange rate floor was established after a number of alternate policy measures failed to achieve the SNB’s monetary policy objectives.”

Japan hasn’t intervened directly in the currency markets in nearly two years, and U.S. officials gave some praise that officials after prodding had ceased verbal intervention as well.  It was observed that Japan’s current account surplus has fallen from 4.0% of GDP as recently as 2010 to 1.2% of GDP in the first half of 2013, but the Treasury report calls the yen “moderately undervalued” on a real effective basis.  The big concern remains that the Abe government might seek to re-balance the economy not as completely through stronger domestic demand as it should be doing.  Worry was also expressed that Japanese wages had not been following price inflation upward.

Much of the report is again devoted to China.  The yuan per dollar rate is not rising as much as it had been doing, even though the currency is still under-valued and the current account-to-GDP ratio of 2.5% has stopped shrinking.  The report predicts a mounting surplus in the future unless the yuan is allow to strengthen and domestic re-balancing occurs.  At the moment, investment (48% of GDP) comprises a much larger share than personal consumption (35%).  China doesn’t disclose intervention directly, but the footprints of intervention point to a recent pick-up in such activity on a pretty large scale.

Finally, note was made that Britain’s current account deficit swelled last year to 3.8% of GDP, the highest relative size since 1989.

Copyright, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.