China s Daring Depreciation

How large will the devaluation of the neo drachma be?

Devaluation and debt restructuring worked.

Today, a devaluation would probably do little for China s trade surplus.

But, the devaluation was much less important than is widely assumed.

But it isn t just importers who are blocking real devaluation.

Vladimir Putin makes the most of the ruble's depreciation on currency exchange markets.

The manat devaluation sparked a viral hashtag on Twitter manatadestek (support manat).

Given these factors, it seems likely that the recent devaluation was driven by a different goal.

In fact, currency devaluations were critical to ending the Great Depression.

As devaluation causes businesses debt burdens to grow in renminbi terms, the risk of non performing loans and bankruptcies rises.

A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

In August of that year, then President Boris Yeltsin declared, There will be no devaluation that is firm and definite.

But inflation has eroded the boost to growth provided by a big devaluation in 2002.

But that announcement came as a surprise (as did the devaluation of China s renminbi this past summer).

If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression.

The benefits would have included a massive devaluation, which would have restored some dynamism to what was once a fast growing economy.

The explanation, I believe, lies largely in the August 11 devaluation of the renminbi, after a decade of appreciation.

In the wake of this summer s stock market plunge and surprising devaluation of the renminbi, the same thing is happening again.

When accompanied by currency depreciation, the results can be brutal as Ukraine is learning the hard way.

It is undoubtedly an important step on the way to Economic and Monetary Union, and I am proud to say that in this respect the European Parliament is already one step ahead of the other two institutions.

Likewise, a rapid deflation in prices and wages, known as an internal devaluation, would lead to five years of ever deepening depression.

Since the onset of the crisis, Greek wages have dropped by more than 15 a process called, appropriately enough, internal devaluation.

Greece should have been told that it could reap the benefits of devaluation, while the international community would act to minimize the attendant costs.

But the impact is severely limited without external devaluation, which is impossible within a monetary union.

Some businesses have demanded a second devaluation, which would be disastrous for those still keeping savings in the battered national currency.

With the risk of devaluation gone, interest rate spreads dropped precipitously, and so did borrowing costs.

In 2008 2009, the CBR pursued a policy of gradual devaluation, bailing out all big state owned and private corporations, regardless of their performance.

But real devaluation, achieved by lowering prices vis à vis their eurozone competitors, is the only way to re establish these countries competitiveness.

Many foreign commentators condemned the devaluation as a blatant attempt to boost Chinese exports a move that would, they warned, spark a new round of currency wars.

After all, without devaluation and the prospect of debt relief, reform merely spells more short term pain, not less.

Protests are rare in the authoritarian country, so the modest anti devaluation demonstrations on February 15 and 16 were a big deal.

Currency devaluation which would boost the competitiveness of domestic industry by lowering export prices obviously is not an option in a monetary union.

Adjustment mechanisms are needed, but external devaluation and inflation are not available, while labor mobility is partial at best.

So it is not surprising that, despite its large devaluation, Iceland continues to run a high current account deficit, adding to its already large foreign debt.

The real devaluation necessary to restore external balance will be enormous, perhaps larger than that in Argentina.

As the Fund learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis devaluation.

The reality is that, under a flexible exchange rate regime, competitive devaluations do not produce undesirable imbalances. On the contrary, they can bolster recovery in participating economies.

Meanwhile, because a significant share of government revenues are dollar linked, while its expenditures are mostly in pesos, devaluation would reduce the budget deficit.

Internal devaluation, combined with austerity and the single market principle (which facilitates capital flight and the hemorrhaging of banking systems) is a toxic combination.

Unlike the taper tantrum and the devaluation of the renminbi, the Fed s rate hike announcement on December 16 certainly was no surprise.

Iceland s superior economic performance should thus not be attributed to the devaluation of the krona, but rather to global warming, which pushed the herring farther North, into Icelandic waters.

All farmers in Europe are facing serious problems at this time. Prices have fallen.

Table 9

The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy.