Imagine a battlefield where, after repeated fighting over 15 years, the various sides have declared an armistice and a fragile peace reigns. Combatants are keen not to start hostilities again: indeed, one of the main actors is incurring considerable expense to avoid any appearance of belligerence. Then, out of the blue, one of the armies, led by a new and untested general, marches into the middle of the combat zone and declares war on a number of fronts.
This describes the arena for the currency wars, one of the main theatres of conflict in international economic diplomacy. During the early 2000s, and then again in the years following the global financial crisis, the US repeatedly accused other countries of deliberately undervaluing their exchange rates to gain a competitive advantage.
This week Donald Trump’s administration have identified China, Japan and Germany as hostile forces in this regard and promised to take them on.
This is not completely absurd but it comes close. None of those three countries is doing anything that may properly be described as competitive devaluation. Japan, which last intervened in currency markets in 2011, resisted the temptation last year despite a sharp rise in the yen that threatened to knock its uncertain recovery off course.
Following complaints about manipulation China unpegged the renminbi from the dollar in 2010 and allowed more flexibility in the rate from 2012 onwards. Over the past year, mindful of the threat to its financial stability from capital outflows and a sharp lurch lower in the renminbi, Beijing has been expensively intervening to hold the currency up, not down.
And while there is a legitimate complaint about Germany’s competitive advantage, it bears most directly on those countries sharing the euro and as such is not really the US’s business.
Indeed, it is the complaint about Berlin from Peter Navarro, Mr Trump’s chief trade adviser, that underlines that his administration is spoiling for a fight, irrespective of the facts. As Germany’s government has been at pains to say, Berlin respects the independence of the European Central Bank even when disagreeing with its policies. Indeed, the German government and the Bundesbank have repeatedly criticised the ECB’s quantitative easing, the policy most likely to weaken the euro.
Although the eurozone governments rather than the ECB technically retain control of currency policy, the only time they have intervened in foreign exchange markets was in 2000. On that occasion it was part of a joint international rescue mission to hold the euro up, not push it down.
True, Germany’s large trade surplus against the rest of the eurozone is a legitimate source of concern. Given the limited trade exposure of the single currency area as a whole to the rest of the world, Germany running a surplus with the other eurozone countries makes it harder for them to generate growth, however weak the euro is.
But it is not really Mr Navarro’s business if German industry has successfully ground down real wages to give itself a competitive advantage against, say, Spain. That looks more like an attempt to sow division within the eurozone than a serious contribution to the debate.
Hardly any serious economist genuinely believes that currencies like China’s are undervalued or that their governments are manipulating them to gain an advantage. Even Fred Bergsten - formerly director of Washington’s Peterson Institute think-tank and the intellectual godfather of much of the US’s exchange rate bellicosity over the past 15 years - admits that the situation since 2014 regarding the renminbi has “changed dramatically”.
Mr Trump and Mr Navarro may fancy themselves as currency warriors who picked up the weapons that weaker administrations let fall.
In reality, they are more like that band of hotheaded soldiers who arrive late armed with outdated intelligence, and then insist on picking fights despite the fact that there is no real enemy left to oppose.
