Wolfgang Munchau: Is Germany a currency manipulator?

Is Germany a currency manipulator? The answer depends on your definition but we should not feign surprise or outrage at the fact that somebody at some point was bound to complain about Germany’s large and persistent imbalances. Last year, the current account surplus reached 9 per cent of gross domestic product, the world’s largest in absolute terms.

Why is Germany running such a large surplus? The superficial answer is that it no longer has a currency of its own, and thus no nominal exchange rate to adjust. This fails to acknowledge the underlying dynamics. During the euro zone crisis, Germany insisted on fiscal austerity for the bloc as a whole. It also gave itself a constitutional balanced budget rule.

This stops the German public sector from running a deficit that could offset the surplus of the private sector. The roots of Germany’s structural surplus lie in the combination of tough fiscal rules and a currency rendered weak by the measures needed to deal with the consequences of the euro zone’s incompetent crisis management.

Imbalance

When Peter Navarro, head of President Donald Trump's national trade council, says the "implicit Deutsche Mark . . . is grossly undervalued", he has a point. He is also right when he says "the German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity within the EU".

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Since the start of 2013 the dollar’s real effective exchange rate against a broad basket of currencies has fallen by 24 per cent. This is primarily due to large shifts in the yen and the euro. Does this make Germany and Japan currency manipulators?

Under the strict US definition, the right answer is: almost but not quite. The criteria developed by the Obama administration for a country to be classified a currency manipulator were: that it is a large trading partner of the US with trade volumes of more than $55 billion per year; that it runs a large trade surplus with the US of more than $20 billion a year; that it runs a large global current account surplus – more than 3 per cent of gross domestic product; and that it intervenes in a persistent and one-sided way in the foreign exchange markets.

Germany easily fulfils the first three criteria but not the fourth. Since Germany does not have its own currency, one could argue that the fourth criterion does not apply.

Yet, while Germany is not manipulating the nominal exchange rate of the euro through market interventions, it is manipulating the real one. Think of the real exchange rate of the euro against the dollar as the relationship between the cost of a European-manufactured Airbus 380 and a Boeing 747.

Currency

Germany suppressed the real wages of its workers and encouraged a policy mix in the euro zone that led to a weaker currency. In other words, it has manipulated some economic variables so that the A380 has become cheaper relative to the 747.

So, for Germany to be deemed a currency manipulator on the US list of criteria, all it would take is to shift the emphasis from the nominal to the real exchange rate. German officials and economists have always shrugged off such criticism.

The European Commission issues similar warnings to Germany each year. Each year, Germany ignores them. The German narrative is that the current account surplus is a sign of economic strength, or a sign of the weakness of others, and that the government has no policy tools to bear down on the surplus, given the mandatory fiscal rules.

Some German economists, like Marcel Fratzscher from the DIW institute in Berlin or Jeromin Zettelmeyer from the Peterson Institute of International Economics, keep making the point that Germany should invest more. That would reduce the current account surplus. This is true, of course, but overlooks the political constraints.

Surpluses

Given the dogmatic position of the ruling Christian Democrats on the need for fiscal surpluses, it means that a lower current surplus requires not only that Angela Merkel loses the German elections in September, but that her party is not even part of the next government.

In other words, the solution would require either a government of the extreme left, a coalition of the SPD, Greens, and the Left Party, or an absolute majority for the Alternative for Germany, the anti-euro party. Good luck with that. (And don’t forget that the SPD supported the constitutional fiscal rule.)

Calling for more investment in the current political environment is about as realistic as asking the tooth fairy to take the surplus coins from Germany to redistribute to everybody who needs them elsewhere in the euro zone.

Back in the real world, the current account surplus will persist and US criticism will get louder. Unlike the European Commission, the US has leverage.

– Copyright The Financial Times Limited 2017