USA, China, India: How likely is a global devaluation race?

More and more countries are beginning to weaken their currencies or to willingly accept a currency weakening. How likely is a devaluation race? Andreas Rees, UniCredit, argues for a new, multi-polar currency system that would eliminate the dominance of the US dollar. Then there would be limits to the financing of current account deficits. This would not completely eliminate devaluation races, but a balance of power would at least provide more stability. Markus Taube, University of Duisburg-Essen, points out that the institutional design of the Chinese exchange rate regime of the Chinese government offers a broad spectrum for influencing economic developments in the country. Since the foremost priority of Chinese economic policy is the promotion of the structural transformation process in the Chinese economy, there is little economic rationality for an economic-policy motivated weakening of the exchange rate of the renminbi. With the willingness of the Chinese government to shift the growth engine of the Chinese economy to the domestic market-oriented central provinces, the necessity of a further flexibilisation and revaluation of the exchange rate increases. For Bernd Kempa, University of Münster, the question of whether the current situation can lead to a devaluation race depends primarily on the future behaviour of the American and the Chinese central banks. However, in his opinion the danger of a further escalation of the currency conflict is minimal. Georg Erber, German Institute for Economic Research (DIW), Berlin, sees no sign of any change in the behaviour of the Chinese leadership - and thus a continuation of the low valuation of the Chinese currency is likely. The EU above all should have a particularly a strong interest in avoiding similarly strong trade imbalances between China and the EU member states as they now exist between China and the US.