November 14, 2011, by Adrian Mateo

Currency Wars: why uneven development matters

The announcement in September 2010 by the Brazilian Finance Minister, Guido Mantega, that an ‘international currency war’ had broken out signalled a new stage in the unfolding of the current financial crisis.  Although initially described as a ‘credit crunch’, which made the crisis appear to be a mere temporary inconvenience, the financial problems caused by US sub-prime lending founded in complex derivatives soon manifested itself as a full-blown financial crisis, which then became a sovereign debt crisis as states rushed in to underwrite the balance sheets of banks and other financial institutions while at the same time losing tax revenue as the crisis spread to the broader economy.  This was then followed by the implementation of a series of austerity programmes as governments cut their spending commitments both to tackle deficit shortfalls and to assure bond holders that they would be good for their debts.

What Mantega was referring to was the ways in which, in response to these broader economic problems, governments were seeking to manipulate the exchange rate of their currencies through various policy measures that implemented beggar-thy-neighbour, mercantilist devaluation strategies designed to boost the competitiveness of domestic exporters.  The precise form of these strategies varied, ranging from direct measures such as the Chinese policy of pegging the renminbi to the dollar in an attempt to stabilise the value of its goods in its major export market, to more indirect measures such as the consequences of quantitative easing, as pursued in the US and the UK, which pumped more cash into the economy, ostensibly to try and stimulate growth but which, by increasing the money supply, also had the effect of undermining the value of both the dollar and sterling in foreign exchange markets.  In response, economies that seen as safe havens for investors in volatile economic times, including traditional bolt-holes such as Switzerland, and rapidly growing economies like Brazil, have resorted to counter-measures to lower the value of their currencies, including selling off their own currencies or imposing exchange controls.

What these currency wars draw attention to is what the geographers Michael Storper and Richard Walker described almost 25 years ago in The Capitalist Imperative (1988) as the ‘inconstancy of capitalist development’ or, in other words, the importance of uneven development.  The financial crisis was fuelled by the accumulation of large global imbalances, which circulated from creditors to debtors in an environment of increasingly light touch regulation.  Money accumulated by oil producing nations and fast growing Asian economies like China was not retained at home but re-exported through sovereign wealth funds to financial markets in North America and Europe.  It was this money, combined with ever more inventive forms of financial innovation, that provided the fuel for the credit boom of the 2000s.

Uneven development is also crucial to understanding the crisis of the Euro zone.  The formation of the single European currency zone was a 30 year project, which began after the collapse of Bretton Woods in the early 1970s, motivated both by an attempt to foster closer economic and political ties within Europe and a desire to create a powerful collective currency for the European nations that would not be subject to the pressure of the foreign exchange markets that constrained the economic policies of individual nations.  However, despite building the Euro over a long period, its architects appeared to pay little attention to the problem of uneven development within the Euro zone, which is made up of economies of different sizes and strengths moving at different trajectories.  Thus, although the blueprint may have been to create a United States of Europe – which, significantly, would be able to stand up to the United States of America both economically and politically – it lacked the ability to respond to uneven development in the way that an integrated national economy like the USA  is able to do: that is, though fiscal transfers over space.  As Gary Dymski has argued, without international fiscal transfers from richer to poorer spaces, it is hard to see how a currency union like the Euro can work.  But this would require even close European political ties which, given the fractious nature of attempts to resolve the Euro crisis, seems increasingly unlikely.  However, a break-up of the Euro will see the recreation of a host of European currencies that will all enter the currency war arena competing among one another in what in all likelihood will be a race to the bottom in a search for competitiveness.

The importance of this development has been recognised by the Integrating Global Society Priority Group at the University Nottingham which has awarded us a Seed Corn grant to investigate the nature of currency wars in more detail.  The award will enable us to undertake a literature review of the currency wars phenomena and to prepare for a larger research grant bid in 2012.  We will provide further updates on this blog as the work progresses.

Professor Andrew Leyshon (Professor of Economic Geography) and Dr Shaun French (Lecturer in Economic Geography), School of Geography

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