Waehrungsabwertung

What Is Waehrungsabwertung?

Währungsabwertung (currency devaluation) refers to a deliberate downward adjustment of a country's official Wechselkurs relative to other currencies, typically in a fixed or semi-fixed exchange rate system. It is a policy decision made by a nation's Zentralbank or government as part of its Geldpolitik or broader economic strategy. This measure reduces the value of the domestic currency, making it cheaper for foreigners to acquire and, consequently, domestic goods and services less expensive on the international market. Währungsabwertung falls under the umbrella of International Economics and Macroeconomics, as its effects ripple through a nation's trade, investment, and overall economic health.

History and Origin

Historically, Währungsabwertung has been a tool employed by nations to address balance of payments issues or to boost economic activity. A prominent example of a system where devaluation played a role was the Bretton Woods system, established in 1944. Under this agreement, the U.S. dollar was pegged to gold, and other currencies were pegged to the dollar, allowing for adjustments (devaluations or revaluations) in cases of fundamental disequilibrium. This system aimed to provide global monetary stability but ultimately collapsed in the early 1970s as persistent U.S. balance-of-payments deficits made maintaining the dollar's convertibility to gold unsustainable.,

⁷The ability to formally devalue a currency is primarily relevant in economies operating under a fixed or managed Wechselkurs regime. In contrast, in a floating exchange rate system, market forces determine currency values, and a decrease in value is termed currency Depreciation rather than devaluation.

Key Takeaways

• Währungsabwertung is a government or central bank's deliberate reduction of its currency's value in a fixed or managed exchange rate system.
• The primary goals often include making exports more competitive and reducing imports to improve the Handelsbilanz.
• It can lead to increased domestic prices for imported goods, contributing to Inflation.
• The effectiveness and consequences of devaluation depend heavily on a country's economic structure, trading partners' reactions, and accompanying policies.
• Währungsabwertung is distinct from currency depreciation, which occurs in floating exchange rate systems due to market dynamics.

Formula and Calculation

While Währungsabwertung itself is a policy decision, its impact is measured by the percentage change in the Wechselkurs. If the old exchange rate is (E_0) (units of foreign currency per unit of domestic currency) and the new devalued exchange rate is (E_1), the percentage devaluation can be calculated as:

Alternatively, if the exchange rate is expressed as domestic currency per unit of foreign currency (e.g., EUR/USD), and the value increases (meaning more domestic currency is needed for one unit of foreign currency), indicating a devaluation of the domestic currency, the formula would be:

For example, if 1 EUR was previously worth 1.10 USD ( (E_0) = 1.10 USD/EUR) and is devalued to 1.00 USD ( (E_1) = 1.00 USD/EUR), the devaluation of the Euro relative to the USD would be:
( (1.10 - 1.00) / 1.10 * 100% = 9.09% )

If we were considering the EUR/USD pair, where the EUR gets weaker, it means the number for USD per EUR decreases. If 1 EUR was 1.10 USD and becomes 1.00 USD, it is a devaluation.

However, if we express it as USD/EUR (how many EUR you get for 1 USD), say 1 USD = 0.909 EUR (1/1.10) and it becomes 1 USD = 1.00 EUR (1/1.00), this means the USD has appreciated, and the EUR has devalued. The percentage change for the EUR would be ((0.909 - 1.00) / 0.909 = -10.01%). Let's stick to the common definition of devaluation where the domestic currency buys less foreign currency.

Let's use a clear example: if the exchange rate was 1 USD = 100 Japanese Yen, and after devaluation, 1 USD = 110 Japanese Yen, the Yen has been devalued. The calculation should reflect the percentage loss of value of the devaluing currency.

Let's assume the rate is expressed as Foreign Currency / Domestic Currency.
Initial rate: 1 unit of Domestic Currency = X units of Foreign Currency.
New rate: 1 unit of Domestic Currency = Y units of Foreign Currency (where Y < X, for devaluation).
Percentage Devaluation = (\frac{X - Y}{X} \times 100%).

Interpreting Waehrungsabwertung

The interpretation of Währungsabwertung hinges on its intended effects and the broader economic context. A primary aim of Währungsabwertung is to boost a country's Export competitiveness. By making domestic goods cheaper for foreign buyers, it can stimulate demand, potentially leading to increased production and Wirtschaftswachstum. Conversely, it makes Imported goods more expensive, which can reduce import volumes and help improve the trade balance.

Howeve⁶r, the impacts are not uniformly positive. A significant concern is the potential for imported inflation, as the cost of foreign goods and raw materials rises for domestic consumers and businesses, reducing domestic Kaufkraft. Furthermore, it can increase the burden of foreign-currency-denominated debt for local entities. The effectiveness of Währungsabwertung depends on factors like the price elasticity of a country's exports and imports and whether other countries react with their own devaluations, potentially leading to "currency wars."

Hypothetical Example

Imagine the fictional country of "Agraria" which operates under a managed floating exchange rate system. Agraria's currency is the "Agra" (AGR), and its central bank keeps the exchange rate relatively stable against the "Globex" (GBX), the dominant international currency. Currently, the exchange rate is 1 GBX = 50 AGR. Agraria's government aims to boost its agricultural Exports, which have been struggling due to high prices on the global market.

To achieve this, Agraria's central bank decides to devalue the Agra. They announce a new official rate of 1 GBX = 60 AGR.

Before devaluation:
An Agrarian farmer sells wheat for 5,000 AGR. A foreign buyer needs 100 GBX (5,000 AGR / 50 AGR per GBX) to purchase this wheat.

After devaluation:
The same wheat still costs 5,000 AGR for the farmer. However, for the foreign buyer, it now only costs approximately 83.33 GBX (5,000 AGR / 60 AGR per GBX). This makes Agraria's wheat more attractive and cheaper for international customers, potentially increasing Agraria's Internationale Wettbewerbsfähigkeit.

Conversely, an imported tractor that cost 10,000 GBX before devaluation would have cost 500,000 AGR (10,000 GBX * 50 AGR per GBX) for an Agrarian farmer. After devaluation, that same tractor now costs 600,000 AGR (10,000 GBX * 60 AGR per GBX), making imports more expensive.

Practical Applications

Währungsabwertung is a tool sometimes utilized by governments and Zentralbanken to achieve specific economic objectives, particularly within a fixed or tightly managed Wechselkurs regime. One key application is to improve a country's Handelsbilanz by making exports cheaper and imports more expensive. For instance, in 2015, China's central bank devalued the yuan, a move widely seen as an attempt to boost its exports amidst slowing economic growth.,

Another ⁵application can be to stimulate domestic demand by making foreign goods less affordable, thereby encouraging consumers to buy domestically produced items. However, such policies also carry risks, including the potential for increased Inflation due to higher import costs. Turkey, for example, has experienced significant currency depreciation (a similar effect to devaluation but market-driven) in recent years, which has impacted its economy and the cost of imports., This high⁴l³ights the complex interplay of currency valuation with broader economic stability and policy goals.

Limitations and Criticisms

While Währungsabwertung can offer short-term benefits, it is not without significant limitations and criticisms. A primary concern is its potential to fuel domestic Inflation. As imports become more expensive, the cost of imported goods and raw materials rises, leading to higher prices for consumers and producers alike. This can erode the purchasing power of wages and savings, particularly if a country is heavily reliant on imports. The Federal² Reserve Bank of San Francisco noted that while devaluation can boost exports, it may also lead to higher import prices and, subsequently, inflation, making it a double-edged sword.

Another cr¹iticism is the risk of retaliatory devaluations from trading partners, leading to a "currency war" where countries continuously weaken their currencies to gain an Export advantage. This can destabilize the global economy and diminish the benefits for any single nation. Furthermore, a devaluation can increase the local currency cost of foreign-denominated debt, potentially straining governments and corporations that have borrowed heavily in foreign currencies. This could deter future Auslandsinvestitionen and even trigger Kapitalflucht if investors lose confidence in the currency's stability.

Waehrungsabwertung vs. Geldentwertung

While both Währungsabwertung (currency devaluation) and Geldentwertung (inflation) refer to a decrease in value, they are distinct economic phenomena.

The confusion often arises because Währungsabwertung can lead to Inflation, particularly imported inflation, as foreign goods become more expensive. However, one is a specific policy action regarding the exchange rate, while the other is a broader economic condition affecting prices within an economy.

FAQs

What causes Währungsabwertung?

Währungsabwertung is a deliberate policy action undertaken by a country's government or Zentralbank. It is typically caused by a desire to make a country's exports more competitive, reduce a trade deficit, or address a significant balance of payments imbalance. It occurs when a country operates under a fixed or semi-fixed Wechselkurs regime.

Who benefits from Währungsabwertung?

Generally, domestic exporters and industries that compete with imports benefit from Währungsabwertung. Exporters find their goods cheaper and more attractive to foreign buyers, potentially increasing sales and revenue. Domestic industries face less competition from imported goods, which become more expensive.

Who is negatively affected by Währungsabwertung?

Consumers are often negatively affected as imported goods become more expensive, potentially leading to higher domestic prices and reduced Kaufkraft. Businesses that rely heavily on imported raw materials or components also face higher costs. Additionally, entities with significant foreign-currency-denominated debt see their repayment burdens increase in local currency terms.

How does Währungsabwertung affect international trade?

Währungsabwertung typically aims to boost a country's Exports by making them cheaper for foreign buyers and reduce Imports by making them more expensive domestically. This can lead to an improvement in a country's Handelsbilanz (trade balance), moving towards a surplus or reducing a deficit. However, the overall effect depends on the price elasticity of demand for exports and imports and potential retaliatory actions by other countries.