Abwertung

What Is Abwertung?

Abwertung, often referred to as devaluation, is the official reduction in the value of a country's currency relative to other currencies or a standard like gold. This is typically a deliberate action undertaken by a government or central bank within the realm of Geldpolitik to influence economic conditions. When a currency undergoes Abwertung, it means that one unit of the domestic currency can buy fewer units of foreign currency than before. This policy tool is distinct from natural currency Abschreibung, which occurs due to market forces. Abwertung is employed to achieve various economic goals, such as boosting Exporte or reducing trade deficits.²²

History and Origin

The concept of Abwertung gained prominence with the establishment of fixed exchange rate systems, such as the Bretton Woods system created by the International Monetary Fund (IMF) in July 1944. Under this system, member countries pegged their currencies to the U.S. dollar, which in turn was tied to gold.²¹ Deviations from these fixed parities, beyond a small band, required official approval from the IMF.²⁰

Historically, many countries have resorted to Abwertung as a policy response to economic challenges. A notable example is the Mexican Peso Crisis of 1994. After maintaining a fixed exchange rate within a band against the U.S. dollar, the Mexican government unexpectedly devalued the peso in December 1994. This decision, aimed at addressing a rising current account deficit and dwindling Internationale Reserven, led to significant financial instability and widespread panic among investors.¹⁹ The crisis quickly escalated, prompting an international bailout package coordinated by the U.S. and the IMF.¹⁸ Similarly, the Asian Financial Crisis in 1997 saw several Southeast Asian economies, including Thailand, Indonesia, and South Korea, experience severe currency devaluations after depleting foreign exchange reserves in attempts to defend their pegs against speculative pressure.¹⁷ The IMF again intervened with large bailout packages, often requiring structural adjustments and further devaluations.¹⁵, ¹⁶

Key Takeaways

• Abwertung is a deliberate government or central bank action to reduce a currency's value relative to other currencies.
• Its primary goals often include making exports cheaper, imports more expensive, and addressing trade imbalances.
• Abwertung can lead to increased Inflation and a decrease in purchasing power for domestic consumers.
• The effectiveness and impact of Abwertung can vary, with potential short-term benefits to exports but risks of long-term economic instability.
• Historically, it has been used by countries operating under fixed or managed exchange rate regimes to restore Wirtschaftswachstum and competitiveness.

Formula and Calculation

Abwertung itself does not have a single, universally applied formula like a financial ratio, as it's a policy decision rather than a calculation derived from market data. However, its effect can be quantified by observing the change in the Wechselkurs.

If we consider the direct quote (foreign currency per unit of domestic currency), an Abwertung means a decrease in this value.
Let (E_1) be the initial exchange rate (foreign currency / domestic currency).
Let (E_2) be the new exchange rate after devaluation (foreign currency / domestic currency).

The percentage of Abwertung can be calculated as:

Alternatively, if using an indirect quote (domestic currency per unit of foreign currency), an Abwertung means an increase in this value.
Let (I_1) be the initial exchange rate (domestic currency / foreign currency).
Let (I_2) be the new exchange rate after devaluation (domestic currency / foreign currency).

This formula quantifies the degree to which the domestic currency's value has been officially reduced.

Interpreting the Abwertung

Interpreting an Abwertung involves understanding its intended and unintended consequences for an economy. A key interpretation is that a country's goods become cheaper for foreign buyers, potentially boosting Exporte. Conversely, foreign goods become more expensive for domestic consumers, which can reduce Importe.¹⁴

For policymakers, an Abwertung often signals an attempt to correct a significant imbalance in the Handelsbilanz or to stimulate a sluggish economy. However, it also implies a reduction in the domestic currency's Kaufkraft on the international stage. A successful Abwertung might lead to export-led growth, while an unsuccessful one could trigger higher inflation, particularly for countries heavily reliant on imported goods and raw materials.

Hypothetical Example

Imagine the fictitious country of "Economia" has its currency, the "Econo," pegged to the U.S. dollar at a rate of 1 Econo = 0.50 USD. Economia's government observes a persistent trade deficit and slow economic growth, with its Exporte struggling to compete in global markets.

To address this, Economia's Zentralbank decides to implement an Abwertung. They announce a new official exchange rate of 1 Econo = 0.40 USD.

Before Abwertung:

• A product costing 100 Econo would cost 50 USD (100 * 0.50).
• A product costing 50 USD would cost 100 Econo (50 / 0.50).

After Abwertung:

• The same product costing 100 Econo now costs 40 USD (100 * 0.40). This makes Economia's exports more attractive to U.S. buyers.
• The same product costing 50 USD now costs 125 Econo (50 / 0.40). This makes imports more expensive for consumers in Economia, encouraging them to buy domestically produced goods.

The percentage of Abwertung in this example using the first formula is:

This hypothetical scenario illustrates how an Abwertung aims to shift consumption towards domestic goods and boost export competitiveness.

Practical Applications

Abwertung is primarily a tool of Geldpolitik used by governments and central banks, especially in economies with fixed or managed exchange rate systems. Its practical applications include:

• Boosting Export Competitiveness: By making domestic goods cheaper for foreign buyers, Abwertung can stimulate Exporte and improve a country's trade balance.¹³ For instance, a 2015 study by the IMF suggested that a 10% fall in a nation's currency value could boost exports by an average of 1.5% of GDP.¹²
• Discouraging Imports: As imports become more expensive, domestic consumers are incentivized to purchase locally produced goods, which can support domestic industries and reduce the Handelsbilanz deficit.¹¹
• Addressing Current Account Deficits: When a country faces a persistent current account deficit (meaning it imports more than it exports and has net outflows of income), Abwertung can be a measure to rebalance the external accounts.
• Increasing Domestic Currency Value of Foreign Debt: While primarily intended to affect trade, Abwertung also means that foreign currency-denominated debt, when converted back into the devalued domestic currency, increases in nominal value. This can make debt servicing more challenging for governments and companies holding such debt.
• Dealing with Capital Outflows: In situations of significant Kapitalflucht, an Abwertung might be a last resort to make holding domestic assets relatively less attractive and stem further outflows, although this can be a double-edged sword.

Limitations and Criticisms

While Abwertung can offer potential benefits, it also carries significant limitations and criticisms:

• Inflationary Pressure: A major drawback is the potential for increased Inflation.¹⁰ As imports become more expensive in local currency terms, the cost of imported goods and raw materials rises, which can pass through to domestic prices.
• Reduced Purchasing Power: For citizens, Abwertung reduces the Kaufkraft of their money abroad, making foreign travel, imported goods, and education overseas more costly.
• Impact on Foreign Debt: Companies or governments with significant debt denominated in foreign currencies face a higher burden of repayment in local currency terms after an Abwertung. This can lead to financial distress or even defaults.
• Uncertainty and Investor Confidence: Frequent or unexpected devaluations can erode investor confidence, deterring foreign direct investment and potentially leading to further Kapitalflucht.
• "Beggar-Thy-Neighbor" Policies: If multiple countries resort to competitive Abwertung to gain export advantages, it can lead to "currency wars," where countries continuously devalue their currencies against each other, destabilizing global trade and financial markets.
• Ineffectiveness in Certain Conditions: The success of Abwertung in boosting exports depends on the price elasticity of demand for a country's exports and imports. If demand is inelastic (meaning quantity demanded doesn't change much with price), the trade balance might not improve significantly, while negative inflationary effects remain.⁹ Studies have shown varying effects, with some indicating a negative relationship between currency devaluation and economic growth in the long run for certain developing economies.⁸

The IMF itself, while sometimes recommending currency adjustments, has also acknowledged that devaluation is only effective when accompanied by sound Fiskalpolitik and other supportive measures.⁷

Abwertung vs. Abschreibung

While both "Abwertung" and "Abschreibung" involve a decrease in value, they apply to different financial contexts and represent distinct concepts.

Abwertung (Devaluation) refers specifically to the official and deliberate reduction in the value of a nation's currency relative to other currencies, undertaken by a government or Zentralbank. It is a Geldpolitik tool used to achieve macroeconomic goals, typically in a fixed or managed exchange rate system. For example, if the Euro is officially devalued against the U.S. dollar, it means €1 now buys fewer USD than before by government decree.

⁶Abschreibung (Depreciation) refers to the reduction in the value of an asset over time, often due to wear and tear, obsolescence, or market forces. I⁴, ⁵n accounting, depreciation is a method of allocating the cost of a tangible asset over its useful life. T³his concept applies to physical assets like machinery, buildings, or vehicles, as well as intangible assets such as patents. W¹, ²hen used in the context of currency, currency depreciation signifies a decrease in a currency's value due to market supply and demand dynamics in a floating exchange rate system, not a deliberate policy action. The confusion often arises because currency depreciation also results in a unit of domestic currency buying less foreign currency. The key differentiator is the underlying cause: government intervention for Abwertung versus market forces for currency depreciation or asset depreciation.

FAQs

What causes a government to devalue its currency?

Governments typically devalue their currency to make their Exporte cheaper and more competitive on the global market, reduce a large Handelsbilanz deficit, or stimulate domestic economic activity by making imports more expensive. It can also be a response to a balance of payments crisis or a way to increase foreign exchange reserves.

How does Abwertung affect consumers?

For consumers, Abwertung generally leads to higher prices for imported goods, which can contribute to Inflation. It also reduces the purchasing power of their domestic currency when traveling abroad or buying foreign services.

Is Abwertung the same as inflation?

No, Abwertung and Inflation are not the same, though they are related. Abwertung is a deliberate policy action that reduces a currency's external value. Inflation is a general increase in prices and a fall in the purchasing value of money. An Abwertung can cause inflation by making imported goods more expensive, but inflation can also be caused by other factors, such as increased money supply or demand.

Can a country with a floating exchange rate perform an Abwertung?

In a pure floating exchange rate system, the value of a currency is determined solely by market forces of supply and demand, leading to Abschreibung (depreciation) rather than official Abwertung. However, even countries with floating rates may undertake policies, such as interest rate changes or direct intervention in the Devisenmarkt, that can intentionally influence their currency's value, mimicking the effects of Abwertung.

What are the risks of Abwertung?

Key risks include triggering domestic Inflation, decreasing the population's Kaufkraft, increasing the burden of foreign currency-denominated debt, and potentially leading to "currency wars" if other countries respond with their own devaluations. It can also deter foreign investment if investors perceive the currency as unstable.