The knives behind the smiles

[Hannah Bell]

INTERNATIONAL ECONOMIC cooperation has given way to a currency war as the leaders of the Group of 20 (G20) leading economies meet in South Korea--and the U.S. is expanding the conflict by taking aim at China.

Thus, in Seoul, the raging currency war overshadowed diplomacy. By undertaking what's known as competitive devaluations of their currencies, the world's major economic powers are trying to make their own exports cheaper relative to their rivals. The motivation: A huge overhang of excess capacity across the whole world economy.

In the U.S., capacity utilization rate for total industry in September was just 74.7 percent, a rate 5.9 percentage points below the average from 1972 to 2009. According to one estimate made earlier this year, "the global economic downturn has brought nations like the U.S., Canada, Germany and Japan back to pre-2003 industrial production levels. In other countries, the situation is worse. Industrial production in Britain, France and Italy is currently the lowest since the early 1990s."

In this environment, countries are worried that major companies and even whole industries could be wiped out by intensifying international competition. By trying to make their own currencies cheaper, they hope to protect their own corporations at the expense of their rivals--which is why this policy, used during the Great Depression of the 1930s, is also known as "beggar thy neighbor."

The currency war, therefore, is but a prelude to a wider trade war. "Not all economies can have a net export improvement," wrote economist Nouriel Roubini. "This zero-sum game in currencies and net exports means one country's gain is some other country's loss, and a competitive devaluation war has ensued...."

What unites Germany and China is the fact that both are what economists call "surplus" countries--that is, they export far more than they import. To rebalance the world economy, they would have to stimulate their domestic economies by raising wages and increasing demand, and make their exports more expensive...

But Germany is resisting this course for fear that it would cost the country its competitive advantage on the world market. At the same time, Germany is also driving the austerity programs being pushed across Europe...

http://socialistworker.org/2010/11/12/knives-behind-the...