Is White House correct to accuse Germany of gaming the euro?

Berlin refutes Trump camp suggestion it may be manipulating euro for national gain

Berlin wonders if the Trump White House has launched a dangerous strategy of presenting itself as the best false friend of euro members who have long resented Germany’s trade surplus and what they perceive as German-friendly ECB monetary policy. Photograph: Carlos Barria/Reuters

Berlin wonders if the Trump White House has launched a dangerous strategy of presenting itself as the best false friend of euro members who have long resented Germany’s trade surplus and what they perceive as German-friendly ECB monetary policy. Photograph: Carlos Barria/Reuters

 

First diesel engine emissions, now the euro. Is Germany fiddling the single currency with the same mendacity as Volkswagen did its diesel engines? Insinuations to that effect from the Trump White House this week sparked a strong and strident rebuttal from Berlin.

In an interview with the Financial Times, Peter Navarro, head of the new White House Trade Council, claimed Germany “continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued”.

“The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity within the EU,” he said.

His remarks stop short of accusing Germany of direct and deliberate currency manipulation, a claim Trump has lobbed towards China and Japan. But the effect has been the same, prompting hot denials from Germany that it is manipulating – or even can manipulate – the euro to its national ends.

“Germany is a country that has always made the case for the ECB [European Central Bank] pursuing an independent policy, as the Bundesbank did when the euro didn’t yet exist,” said Dr Angela Merkel this week. “I have no influence over the situation as it is and I won’t want to change anything.”

Trade surplus

The argument about Germany’s trade surplus comes around as regularly as Christmas and, to date, has always been batted off by Berlin with no change to the status quo. Will this time be any different?

First, facts from fiction. Germany’s trade surplus – the value of exported goods sold to imported goods bought – is a whopping €270 billion or almost 9 per cent of Germany’s gross economic product. It’s a long-running bone of contention with Germany’s EU neighbours, but also with international organisations like the International Monetary Fund, because it creates massive trade imbalances and breaches the EU’s trade surplus ceiling of 6 per cent.

But the trade surplus is a hotly debated issue in Germany, too. The majority camp are proud of the disparity between imports and exports, saying it shows the world cannot get enough “Made in Germany” goods.

This camp – Germany’s economic and political mainstream – feels particularly stung by Navarro’s claims.

First, they say, it’s not Germany’s problem if the rest of the world isn’t making enough things Germans want to buy. Second, they say, the trade imbalance goes back long before the current euro slump against the dollar. And third: Germany’s Bundesbank is just one voice on the governing council at the ECB.

And, for years, the Bundesbank – and increasingly leading German politicians – have been furious at the ECB for low interest rate policies they say are disastrous for German savers.

‘Undervalued’ euro

Economist Marcel Fratzscher, head of Berlin’s DIW economic institute, leads the dissenting camp. He is in two minds about the Navarro attack. The euro is not “grossly undervalued”, he says: at €1.07 against the dollar, he sees just a small gap to the fair, long-term exchange rate of $1.15-$1.30 to the euro.

And yet Prof Fratzscher sees a grain of truth in the Navarro claim, even if he disagrees with the analysis. The problem is not that Germany is exporting too many competitively priced luxury cars, says the Berlin economist, but that Germany isn’t doing enough on the other side of its accounts: Berlin invests too little.

The money Germany earns abroad selling high-end cars and machines should be brought home and invested in the German economy, he says, in particular in education and infrastructure.

“If Germany did that, it would have not only a short-term but also a long-term growth and competitiveness, better incomes and more prosperity,” he said.

The trouble is that no one near Merkel or the Bundesbank heeds Fratzscher’s arguments, or the economic thinking behind them.

Dr Stephen Kinsella, senior lecturer in economics at the University of Limerick, meets Bundesbank officials in regular central bank working group meetings. Whenever Germany’s trade surplus arises in talks, and it does so often, he says Frankfurt officials react tetchily to demands to spend more.

“They say that Germany is big, but not big enough to influence the euro economy,” he said. “Even if Germany spent more and invested more, shifting Germany’s debt-to-GDP from around 80 to 100 per cent it is not a big enough stimulus to stimulate the EU economy.”

If anything, trading partners’ claims that Germany is the villain of the euro zone has had the opposite reaction here. Since the euro crisis, a growing number of German conservatives in Merkel’s Christian Democratic Union (CDU) – not to mention the country’s rising far-right – see Germany as, at best, a euro zone victim and, at worst, the single currency patsy.

Hostage to fortune

From their perspective, Berlin is a hostage to the ECB fortune. Monetary policy in favour of a weaker euro and low interest rates, they say, has allowed inflation nibble away at German savings. Scarcely a week goes by without another hysterical hyperinflation headline or broadside at the ECB governing council where the Bundesbank is just one dissenting – and permanently overruled – vote.

Far from the ECB’s silent partner, even long-serving German conservatives like federal finance minister Wolfgang Schäuble are so incensed by its monetary policy that they no longer observe the long-running rule not to discuss or criticise ECB monetary policy in public.

Meanwhile Germany’s growing hard-right conservative camp sees another long-term risk with Germany’s surplus inside the currency union. It is linked to the ECB’s multitrillion sovereign debt buy-up to stabilise the euro and hold interest rates low, an intervention that could end with a bump for German exporters.

“German firms can only export to Italy, Spain, Greece or Portugal as long as they can do so on tick, charging it to the ECB’s endlessly long bill,” argued hard-right conservative commentator Roland Tichy. Arguments like his, echoed by the far-right Alternative Für Deutschland, stoke resentment here that the euro, far from a free ride, is a plot against Germany.

Economic ideologies

For UL economics lecturer Kinsella, the row reignited by Navarro is symptomatic of a disconnect between divergent economic ideologies and political cultures of national euro members. The only way out, he suggests, is if elections later this year appoint leaders in France and Germany more positively disposed to fiscal stimulus.

Germany’s centre-left Social Democrats (SPD) have vowed, if they oust Merkel, to launch a large-scale stimulus package in a bid to end Germany’s investment backlog and reduce its trade surplus. Until then, though, in a rare moment of unity, both fans and critics of Germany’s trade surplus have united to dismiss the Navarro claims that Berlin is playing the ECB and euro for its own gain – and others’ pain.

“Many in Germany are criticising the ECB expansionary monetary policy,” points out Prof Fratzscher of the DIW. “If Germany had its way and ECB policy was tightened, the euro would strengthen.”

Though dismissive of the Navarro insinuations of Germany currency manipulations, Berlin officials remain undecided whether his remarks were motivated by ignorance or malice.

If it’s the latter, Berlin wonders if the Trump White House has launched a dangerous strategy of presenting itself as the best false friend of euro members who have long resented Germany’s trade surplus and what they perceive as German-friendly ECB monetary policy.

Weeks after President Trump dubbed the EU as a “vehicle for Germany”, Berlin has not ruled out that the new president is deliberately stirring up discontent towards the euro’s largest member with the long-term aim of dividing further the already-fraught currency bloc.

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