Putin. Erdogan. Orban. Bolsonaro. Trump…

Western European defeatists tremble at the mere mention of the names of nationalist strongmen that rarely miss an opportunity to point out weaknesses of the European Union.

One of their favourite targets is the Euro and its perceived instability due to the joint currency’s lack of a central fiscal authority.

Currency markets, however, can’t be easily fooled by propaganda. They provide full transparency on investor assessment of a currency’s value, especially if one takes a long-term view.

In fact, it turns out that at the time of writing (07 November 2020), the Russian Ruble and the Turkish Lira lost more than half of their value against the Euro since Putin and Erdogan took power.

Brasil’s Bolsonaro (losing about a third) and Hungary’s Orban (losing about a fifth) are the next “strongmen” whose currencies have plummeted significantly.

The picture looks less dramatic for Trump (US Dollar) and Johnson (UK Pound Sterling). However, these ‘strongmen’ haven’t been in power for as long as Putin and Erdogan, even though it is doubtful how much time both still have to catch up.

One might wonder whether the collapse in currency values is a reflection of deliberate policy decisions made by nationalist populists, or whether it is simply a reflection of investors and traders voting with their feet.

As it turns out, a weak currency offers several attractions to a nationalist leader–in spite of the fact that the national ego might be bruised by the image of a collapsing currency.

* Exports (sold in foreign currency) become cheaper to produce (in national currency), raising the country’s competitiveness on world markets.

* Imports (bought in foreign currency) become relatively more expensive (in national currency), steering domestic buyers towards homegrown products.

As a result, voters thus might turn “inwards”. Expensive foreign holidays and imported status symbols (from iPhones to Mercedes cars) are losing their allure on the domestic mass market, all in line with the nationalist agenda.

On the flipside, even vast markets such as Russia or Turkey are increasingly part of a globally interconnected economy. Components become more expensive to import, putting a strain on domestic manufacturing beyond mining and quarrying. Also, complex services not broadly available on the local market (eg consulting, finance, IT) will become more expensive to purchase, pushing up inflation.

In the case of Turkey, both effects combined have contributed to raising both the country’s inflation rate and its unemployment rate above 10%–a uniquely high “misery index” among all of the larger global economies, while running a massive current account deficit of almost 4%. A closer look at its sectoral breakdown reveals that 25% of Turkey’s economy still come from agriculture, making the country highly dependent on imported products.

Russia, however,  enjoys relatively low inflation (2.2%) and benign unemployment (5.2%) while actually achieving a small current account surplus, thanks to its transformation from commodities to industry and services.

Bottom line: not all strongmen are created equal. But all of their currencies are losing.


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