You might not have heard it but the Swiss National Bank yesterday fired a shot which will be heard around the world, and could prove to be bad news for Australia.
What happened is that Switzerland decided that the value of its currency had risen too far against other currencies, imposing an unacceptable burden on exporters.
By some calculations Swiss exporters have been hit with a 30% increase in the value of the franc, forcing them out of some markets, and leading to factory closures.
It should because what has been happening in Switzerland has also been happening in Australia – and in other export-focused countries such as Japan and Singapore.
On one level, what the Swiss did with their decision to “peg” the franc at a rate of SF1.20 against the euro was to defend local industry, a move which will play well at home, even if it leads to higher rates of inflation.
But, when it comes to money what happens in Switzerland is always an event with global repercussions and this time it is possible that:
- The Swiss currency defence move signals the start of global, coordinated, action by other central banks to defend their currencies.
- If it is not the first sign of coordinated action orchestrated by supra-national financial organisations, such as the International Monetary Fund, then it could be the start of a global currency war.
- Currency wars, which are essentially a “race to the bottom” to make your currency cheaper to boost exports often lead to trade wars.
- Trade wars, which involve the erection of economic barriers, such as taxes on imports (tariffs), quotas on imports, and payment of government subsidies to keep factories operating even when they’re broke, can lead to the real thing – war.
- Long before that worst of all outcomes is reached there will be a ceremony to mark the end of the grand economic experiment known as globalisation.
It is this “beggar thy neighbour” process of actions such as pegging currencies, and erecting trade barriers, which ought to have Australians worried.
The first stage of worry is that of not knowing what comes next. Is it possible, for example, that the tiny country of Switzerland, which accounts for less than 1% of world trade, has fired a shot which will kill the euro, and the European Union itself?
Germany in particular will be looking at the bold decision of the Swiss to say enough is enough, asking the question about whether it’s time to revert to the beloved deutschmark, leaving bankrupt members of the EU, such as Greece and Portugal, to their fate as economic failures.
If the euro disintegrates, what will the U.S. do? It can hardly allow its domestic industries suffer against even higher levels of competition such as that forced on it by the unfairly low value of the Chinese currency, the renminbi.
And if China and the U.S. get sucked into a race-to-the-bottom currency war where does that leave Australia with its floating dollar which, in theory, goes even higher. Would there be any factories left open in Sydney and Melbourne at an exchange rate of $US1.50?
By now, you get the picture and while most early reporting on Switzerland’s decision to defend its currency has focussed on how the Swiss could make gold even more attractive as a safe haven in a “paper currency war” the reality is that gold could be just one of the havens which prove attractive to investors.
The Australian dollar, backed by a country which is not facing a debt crisis, and which has strong terms of trade thanks to China’s demand for resources, and high interest rates, could easily be driven higher in the search for safety.
In truth, no-one knows precisely what will happen if a full-scale currency war breaks except for one thing – currency wars lead to trade wars lead to slower global growth.
And all that before asking the question about whether the Australian Government is up the challenge.