Beggar-my-neighbour is wrong game

Martin Wolf makes a seemingly compelling case for a further depreciation of sterling's real effective exchange rate ("A weaker pound is welcome but is not a panacea", February 22). He does so by arguing that the UK must find ways to boost overseas demand for its products in order to bring about the needed rebalancing of its economy. This line of reasoning leads him to go so far as to advocate that the Bank of England should buy foreign currency to weaken the pound rather than buying yet more gilts.

A crucial flaw in Mr Wolf's argumentation is that it is made purely from a UK vantage point in total disregard of the needs of the UK's main trade partners. In particular, it fails to recognise that the very same argument about the need to boost overseas demand in order to facilitate a needed rebalancing of the domestic economy can be made in the US, Japan and Europe. Following his line of reasoning, each of these economies too would be justified in having their central banks engage in foreign exchange intervention to weaken their currencies as they struggle to cope with the need for public and private sector deleveraging.

History would suggest that allowing each country to pursue its own exchange rate policy in disregard of its trade partners' needs all too often leads to an unhappy result for the global trading system. It would be a shame if the UK were now to be among the first countries to engage actively in beggar-thy-neighbour types of exchange rate policy rather than to seek an effective way to co-ordinate exchange rate policy among the world's main trade partners.

 

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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