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Euro zone has no general to fight a global currency war

Jens Weidmann is worried about the independence of central bankers forced to become fighters in currency wars. The head of the Bundesbank thinks some are bowing to their governments' pressures to embark on loose monetary policies which lower currency values. He speaks about Japan and has Europe in mind. His immediate adversaries are the euro zone political leaders who think a weaker euro would help boost the region's economy.

But for once Mr. Weidmann agrees with Mario Draghi, the head of the European Central Bank. If there is a global currency war, the ECB is unlikely to take up arms.

First, there is no clear and present danger. The euro has risen fast against both the dollar and the yen since last July but remains 16 per cent and 20 per cent cheaper, respectively, than at its July, 2008 highs. Besides, while the ECB is holding relatively firm on interest rates for now, the euro zone's poor economic prospects may soon lead to a softer stance. U.S. or Japanese quantities of easing are out of the question, but the ECB's action would contribute to keep the currency from rising too much.

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The second reason Mr. Weidmann has nothing to fear on the ECB front is that most of his ECB colleagues share his conviction that exchange rates aren't part of the central bank's tool box. In their intellectual tradition, exchange rates in a floating rate world are a result, not a tool. Governments may find it convenient to blame the strength of the euro for their respective economies' shortcomings. But the most influential member of the monetary union – Germany – has an export-driven economy that seems to perform as well with a strong euro as with a weaker one. And Berlin is too obsessed by inflation to even contemplate a controlled devaluation of the currency.

Furthermore, the central bank independence that Mr. Weidmann worries so much about is a fact for the ECB, given the number of governments involved and their separate agendas. So the Bundesbank chief is tilting at windmills, at least if he has Europe in mind.

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