It is no surprise that Peter Navarro, the head of the new US National Trade Council, has picked on the euro to pillory Germany and implicitly the European Union. Currencies are often the lightning rod for protectionist sentiments and so resonate well with increasingly protectionist rhetoric of the new US administration.
What is surprising is that instead of China – which for years Congress tried to label China as currency manipulator – this time the villain is Germany, accused of using a ‘grossly undervalued’ euro to ‘exploit’ the US and its EU partners. Besides the political message directed to the German chancellor – Angela Merkel is definitively not a favourite of Donald Trump – Navarro uses the long standing and legitimate argument about Germany’s excessive current account surplus to unpack a whole theory of ‘currency manipulation’. He is wrong on a number of counts.
First, he deliberately ignores the fact that Germany is part of Europe’s monetary union and refers to the euro as an ‘implicit Deutschmark’. Second, as a result, he believes that Germany influences eurozone monetary policy, implicitly suggesting that the European Central Bank (ECB) is not an independent central bank. Third, he brushes off the fact that the current weakness of the euro is a consequence of the divergent monetary policies of the US Federal Reserve and the ECB – a divergence that materialized in late 2014 when the ECB signalled the intention to embracing quantitative easing to contain the risk of deflation. Finally, he seems to believe that there is a direct link between trade imbalances and ‘currency manipulation’, hence Germany’s large trade surplus is the result of direct interventions to keep the euro ‘grossly undervalued’.
Worryingly, Navarro’s argument, with its mix of bad economic rhetoric, reveals a view of international economics and governance that is deeply nationalist, protectionist and authoritarian. Looking at the world through this framework it is inconceivable that a large nation like Germany, with a dynamic economy and a thriving exports sector, could be part of a rules-based system of governance without manipulating the rules of this community and violating the independence of the central bank. Indeed, Germany has been a harsh critic of the ECB’s monetary policy.
There is, however, a point on which Navarro is right: Germany has an excessive current account surplus (currently 9 per cent of GDP or $319 billion). This is mainly the result of Germany’s more competitive real exchange rate vis- à-vis the other member states of Europe’s currency union – in other words, Germany’s price level relative to the other eurozone countries, expressed in euro, make German exports within the eurozone relatively cheaper. But this is a problem mainly for the eurozone than for the rest of the world, and over the years since the global financial crisis it has resulted in a race to the bottom in some countries, particularly in southern Europe. Germany has fended off any suggestion – by the G20, the IMF and the European Commission – to adjust its surplus, reduce savings and spend more. In this sense, Germany is abusing its position as the largest economy in the eurozone – and in the EU – to impose its own approach to economic policy. Putting pressure on Germany is certainly a good thing, but threatening Germany can only make a difficult situation worse – not least because the other eurozone countries would have no choice but support Berlin.
As for the dollar, confusion reigns supreme in the new US administration on where they see the greenback. From Navarro’s argument it should logically be inferred that the dollar is a key element of the new US trade policy. But then Treasury Secretary Stephen Mnuchin during his confirmation hearing suggested that the ‘long-term’ strength of the dollar was important. And Trump’s proposed policies – lower taxes, higher infrastructure spending and a new border tax on imports – go in the direction of a stronger dollar and a wider trade deficit. Finally, the Federal Reserve’s monetary policy stance is supporting the value of the greenback.
So if in the short term the dollar is strong, and the desired long-term trajectory is also for a strong dollar, why blame Germany – or China or Japan? There isn’t a logical answer to this question, but expect more ‘currency manipulation’ rhetoric in the weeks to come.
Paola Subacchi is director of the International Economics Department at Chatham House. She is an expert on the functioning and governance of the international financial and monetary systems, and advises governments, international organizations, non-profits, and corporations.