Emerging market currency turmoil could hurt Europe too
Letter to the Editor

Article Highlights

  • As emerging market currencies come under pressure, Euro could fare poorly

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  • Politics and currencies could spell trouble for Europe in the coming year

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From Dr Desmond Lachman.

Sir, Martin Wolf joins the Davos and IMF consensus in believing that the world economic outlook has brightened as the advanced economies at last seem to be taking off (“The challenges of a post-crisis world”, January 29). He does so by seemingly downplaying the risks associated with the normalisation of monetary policy in the advanced countries. He also does so by seemingly overlooking the deteriorating political environment in both the emerging market economies and in Europe.

Since the beginning of the year, as Federal Reserve tapering has become a reality, the currencies of a number of major emerging market economies including Brazil, India, Indonesia, South Africa and Turkey, have come under considerable market pressure. There is every reason to expect that such pressure is likely to persist as earlier emerging market capital inflows reverse in response to rising US interest rates. Not helping matters is the fact that all of the countries just listed face contentious elections in 2014 that will all too likely constrain their political room for manoeuvre in responding to currency weakness.

In the event that continued currency turbulence and a growth slowdown in the emerging markets prompt global financial markets to shift to a risk-off mode, this could lead markets to focus anew on the very poor public and private sector debt dynamics in the European economic periphery. This could cast a pall over Europe’s immediate economic growth prospects, coming as it does at a time that Europe approaches its all-important May 2014 European parliamentary elections and at a time that European politics show every sign of continuing to fragment.

Desmond Lachman, American Enterprise Institute, Washington, DC, US

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