Currency exchange rates in the management of the economic crisis

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Raúl Sánchez Fernández

A study carried out by a Universidad Carlos III de Madrid (UC3M) professor analyzes the importance of the exchange rates of major currencies in dealing with the current economic crisis, which up to now, as far as public opinion is concerned, have stayed in the background.

When the economic crisis began in the summer of 2007, one of the main features of the global economy was the existence of enormous foreign trade deficits in some countries, such as the USA, together with those with favorable trade balances, such as the case of China. These global imbalances are a consequence of various factors, one of the principal ones being the currency exchange rates. That is the conclusion of the UC3M professor, Juan Antonio Cerón, in a study that will soon appear in the Revista de Economía Mundial, published by the Sociedad de Economía Mundial (Society of the World Economy), entitled “Crisis económica: ¿qué papel hay para las monedas y los tipos de cambio?” (The Economic Crisis: What role do currencies and exchange rates play?), and which has earned second place in the II Edition of the Jose Luis Sanpedro Prizes, which are also awarded by this Society.

There have always been foreign trade imbalances, but never in history have they reached the magnitude of recent years, the UC3M Department of Business Economics researcher remarked. "Thus, according to how the exchange rates evolve, the currency exchange rates will depend on the resolution of the economic imbalance on a world-wide scale, and to a large degree, the recovery of production in each country, as well as its most important consequence, which is the creation of jobs”, stated Cerón.

Before the crisis, one of the recurring areas of interest among those economists who study the international arena was currency rates, he points out in his study, which have taken a back seat because of the extreme aggressiveness of the crisis. "When the crisis became political, some areas acquired more importance than others”, the expert explained. In this way, the situation of the subprime mortgages at the beginning, the need to later shore up the banks and other finance sector institutions, and finally the impact on the real economy, which especially materialized into the rise of unemployment, have grabbed all the attention, according to the expert. "Other more technical elements, and ones which are more difficult to deal with as far as public opinion is concerned, albeit important, have been pushed to the background, despite forming part of the basic elements of the crisis. Currency rates” he concluded, “are one of those elements”.

The role of the major currencies

The work published by this economist attempts to approximate the interrelations between the exchange rates, the economic function of the major currencies, and the way in which the crisis is being managed, incorporating the latest contributions from the academic world. The truth is that we are living in an era when, but for a few exceptions, the currency rates are determined by the markets, and in the long term, respond to the evolution of the economy in each country. But in the short and middle term, there are other elements that exert a powerful influence, such as interest rates, international trade, and capital flows, the professor explained.

In any case, he explained, we must not forget that the dollar played a pivotal role in world markets, not only because of US economic clout, but because of its utilization as a currency vehicle in the majority of the global transactions, although highlighting the role that the Chinese currency, the renminbi, has taken on. "The great economic strength of this country, sustained until now by exports, has placed the currency in a relevant position, especially because, contrary to what happens with many other currencies, the exchange rate of the renminbi is fixed by the government”, explained Professor Cerón.

Tipos de cambio
Dollar vs Euro exchange rate evolution

When the crisis began, Spain was one of the countries with the highest foreign trade deficits. "What happened was the exchange rate of our currency did not depend only on us, but on all of the countries in the Euro zone, so that there is little that we could do from our country to change things”, said the UC3M professor, who also pointed out that the impact of the exchange rates in our economy is not as important as in other countries given that a large part of our foreign trade is precisely with countries who also use the euro. What are some other possible solutions to correct an imbalance in foreign trade? “Save more, something that we are already doing if we look at the latest figures, and at the same time, improve competitiveness of our products in foreign markets, with the aim of increasing our sales”, he pointed out.