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Policy Brief 12-19
Combating Widespread Currency Manipulation
[pdf]
Joseph E. Gagnon
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Widespread currency manipulation, mainly in developing and newly industrialized economies, is the most important development of the past decade in international financial markets. In an attempt to hold down the values of their currencies, governments are distorting capital flows by around $1.5 trillion per year. The result is a net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps in the two economies. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies and instead achieved sustainable growth through higher domestic demand. Gagnon identifies the 20 most egregious currency manipulators over the past 11 years. Four groups of countries stand out: (1) longstanding advanced economies such as Japan and Switzerland; (2) newly industrialized economies such as Israel, Singapore, and Taiwan; (3) developing Asian economies such as China, Malaysia, and Thailand; and (4) oil exporters such as Algeria, Russia, and Saudi Arabia.
Although currency manipulation to boost trade balances is a violation of the Articles of Agreement of the International Monetary Fund (IMF), there is currently no procedure to punish or curtail it. The best forum for sanctions against currency manipulators is the World Trade Organization, operating in consultation with the IMF. Countries affected by currency manipulation would be authorized to impose tariffs on imports from manipulators. In order to get manipulators to agree to this change in international rules, the main targets of currency manipulation—the United States and the euro area—may have to play tough. One strategy would be to tax or otherwise restrict purchases of US and euro area financial assets by currency manipulators.
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Listen to related interview: Currency Manipulation: It's Not Just China
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See also: A Ranking of Currency Manipulators
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Op-ed
Europe's Banking Union: Possible Next Steps on a Bumpy Path
Nicolas Véron
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The heads of state and government of the euro area have issued a declaration widely interpreted by investors as the founding act of a European banking union, about which European policymakers have been increasingly vocal. Their commitment remains little more than a promise, with multiple caveats. But Europe's leaders will now renege on this promise at their peril. The general perception is that an irreversible step has been made, with vast consequences that will unfold only gradually. Ultimately, a European banking union cannot be considered in isolation from the other necessary building blocks to make the euro area policy framework sustainable—namely fiscal union and a political union to strengthen democratic accountability and federal executive decision-making capacity. It is conceivable that not all of these implications have been taken into consideration by all euro area leaders. But they should not regret their move towards banking union, which is needed if the euro area crisis is to be eventually resolved. Now, there is no turning back.
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Op-ed
Why Toomas Ilves Is Right and Paul Krugman Is Wrong
Anders Åslund
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Last year, Estonia's GDP grew by 7.6 percent, the highest growth rate in Europe, and high growth continues. Many argue that Estonia is special, but Latvia and Lithuania pursued the same policies and achieved equally good results. To achieve this success, Estonia carried out a vigorous "internal devaluation," with large cuts in public expenditures and wages as well as structural reforms. These three governments did exactly what they were supposed to do, and the Baltic peoples understand that, as evident from the reelection of the Estonian and Latvian governments after the crisis. Nominal devaluation has neither been necessary nor beneficial for regaining competitiveness. On the contrary, if a country maintains a fixed exchange rate, it is forced to undertake more structural reform. Fixed exchange rates prompted the greatest fiscal and structural adjustments in Central and Eastern Europe. The governments in Southern Europe could have followed in Estonia's footsteps, but they chose not to. Instead, they pursued Paul Krugman's policy of maximum fiscal stimulus and the results are evident. The question is no longer whether the Baltic lessons are relevant to Southern Europe, but when the Southern European governments will face up to reality.
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Peterson Perspectives Interviews
Currency Manipulation: It's Not Just China
Joseph E. Gagnon says that while China has improved its record on currency manipulation, other countries are keeping the global total high at $1.5 trillion a year, impeding the US recovery.
More Slowdown in China
Nicholas R. Lardy assesses the latest Chinese economic output numbers, which show that a drop in exports and housing investment are contributing to slower growth.
LIBOR, Part II: What Can Be Done
Simon Johnson explains that LIBOR must be changed from a hypothetical to a real rate but that problems could arise from relying on it in a financial crisis like the one in 2008.
LIBOR, Part I: Fraud Is the Issue
Simon Johnson explains why the LIBOR scandal is at heart a matter of financial fraud, with broad repercussions for consumers, financial institutions, and other players.
LIBOR: A Question of Trust
Edwin M. Truman explains why the spreading LIBOR scandal has the potential of raising new doubts over the reputations for honesty of many large financial institutions.
Of Debts, Markets and 'Fiscal Cliffs' in Europe and the United States: Part II
William R. Cline says that expiring tax cuts and other changes due December 31 would add up to 5 percent of the US economy, but the United States can afford to go over the 'cliff' and then fix the problem.
Of Debts, Markets and 'Fiscal Cliffs' in Europe and the United States: Part I
William R. Cline says that the latest steps by the European Council improve prospects for Spain and Italy, potentially lifting prospects for them and the rest of Europe.
Should the Fed Do More to Boost the Economy? Part II
Joseph E. Gagnon says that the US Federal Reserve could take a number of steps to boost the economy, especially the purchase of mortgage-backed securities to make mortgages more affordable for Americans.
Should the Fed Do More to Boost the Economy? Part I
Joseph E. Gagnon explains why, in the face of an anemic economic recovery, the US Federal Reserve's response has been equally anemic.
Recent Blog Posts
PIIE Noted in the News and on the Web
NPR's All Things Considered
What Does LIBOR Mean to the United States?
Simon Johnson tells NPR that the LIBOR reporting structure has given banks an incentive and an opportunity to use lying as a systematic approach to reporting on interest rates. Listen to related interview.
NPR's Morning Edition
The European Central Bank's Guide to Influence
Jacob Funk Kirkegaard explains that the European Central Bank is using its control over making more euros to extract governance concessions from European countries.
NPR's Morning Edition
Euro Currency Still Faring Well, For Now
Simon Johnson explains why he still thinks the collapse of the euro is a distinct possibility.
Bloomberg Businessweek
ECB Role Is to Respond to Weakening
Jacob Funk Kirkegaard says the European Central Bank's move to cut interest rates is a standard response to a weakening euro area economy.
Bloomberg
Will to Save Euro Area Unbreakable, Kirkegaard Says
Jacob Funk Kirkegaard talks about the European Central Bank's decision to cut its benchmark interest rate by 25 basis points to 0.75 percent and the future of the euro area.
NPR's All Things Considered
As Leaders Meet To Save Euro, Nations Face Trade-Off
Jacob Funk Kirkegaard and Nicolas Véron say the euro area has reached the point of no return and that European leaders now need to develop the road map toward an economic and monetary union.
Salzburg Global Seminar
The Future of the Multilateral Trading System and the World Trade Organization
Jeffrey J. Schott gave the closing speech at the Salzburg Global Seminar panel on the WTO, presenting his WTO recovery plan, as detailed in his recent policy brief Will the World Trade Organization Enjoy a Bright Future?
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ECONOMIC SANCTIONS UPDATE |
Economic sanctions case studies on Iran [pdf] have been updated.
US v. Iran (1984–2005: Terrorism, Proliferation)
UN, US [EU] v. Iran (2006– : Proliferation)
by Gary Hufbauer, Jeffrey Schott, Kimberly Elliott, Julia Muir, and Milica Cosic
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