Currency War in Europe

Switzerland has pegged its currency to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. This column argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.

A current-account surplus is the mirror image of a capital export. A country that is running persistent current-account surpluses is thus persistently exporting capital. An important question to consider is which sector is investing abroad, the private or the public sector? If it is the public sector which invests abroad, in particular if it is done by the central bank via the accumulation of foreign-exchange reserves, this is often called ‘currency manipulation’.

A commonly used indicator of the degree to which a country manipulates its currency is the accumulated stock of foreign-exchange reserves relative to GDP.

The table below shows the degree of foreign exchange intervention for two countries, which we will call “CH” and “Ch”.

The degree of influence on the domestic currency can be measured in two ways:

• The stock of foreign-exchange reserves as over GDP, or;
• The change in foreign-exchange reserves accumulated over the recent past, again relative to GDP.

Table 1 shows that on all measures CH emerges as the greater ‘manipulator’ than Ch. At the middle of 2012 the value of the foreign-exchange reserves (largely held in euro) of CH amounted to close to 70% of GDP; almost twice as much as the roughly 40% of GDP for Ch. Over the last 12 months Ch has actually stopped intervening, but this might be due to transitional factors. The three year perspective might thus be more appropriate. But even over this longer period, one finds that CH manipulates more than Ch.

Table 1. Foreign-exchange reserves, stocks and flows, as % GDP