And now a furious row has broken out between The Trump government, the EU and Germany. But when the new US National Trade Council, Peter Navarro, says that the euro is an “implicit Deutschmark’ that is grossly undervalued” does he have a point?The simple answer is yes, at least partially, but there is not much Germany can do it about. The policy is hardly deliberate.
While Donald Tusk, the European Council President, has lumped the US under Trump into the same category as Russia, China and radical Islam, in representing an existential threat to the EU, Peter Navarro has not been mincing his words. He told the FT that Germany “continues to exploit other countries in the EU as well as the US with an implicit Deutschmark that is grossly undervalued.”
It is probably true to say that if the Deutschmark was still Germany’s currency, and not the euro, then the currency would have seen a much stronger performance in recent years than the one that replaced it.
But this is hardly the fault of Germany.
The main reason why the euro is as cheap is ultra-loose monetary policy from the European Central Bank. But which central bankers have been most critical of this policy? Why - it has been German central bankers.
And as Jennifer McKeown, Chief European Economist at Capital Economics asks: "what does Mr Navarro expect Germany to do about it?"
Chancellor Angela Merkel stated that “we won’t exercise any influence over the European Central Bank, so I can’t and I don’t want to change the situation as it is now."
And with core inflation so low in the euro area, there is no pressure on the ECB to up rates.
Jennifer McKeown said that "Germany’s competitiveness is not a result of currency manipulation but of relative wage restraint and strong productivity growth. The country underwent a long period of flat or falling unit labour costs after joining the currency union while those in the US and Italy kept rising. So it is understandably proud of its exporting prowess."
Nigel Green, founder and CEO the of deVere Group said that “much of the indignation - on both sides - is naive and hypocritical. Whilst it may not be fair nor right, it can be sensibly assumed that currency manipulations do indeed take place around the world as central banks, quite rightly, look out for their jurisdictions’ best interest using all their tools that they have at their disposal, such as competitive devaluations. As such, the outcry following Mr Navarro’s statements seems somewhat naive. It is also perhaps naive to think that a Trump administration would not take this approach, given the previous rhetoric on this issue.”
Not just naive, but hypocritical too
Mr Green pointed out that “the term 'currency wars' originated from the Brazilians after the Fed began their Quantitative Easing operations at the end of 2008 and the dollar weakened. The US has, it can be argued, been as enthusiastic about using monetary policy to devalue as the Europeans and the Asians.”
There is no doubt that that the cheap euro helps German exporters, but it hinders other exporters from the euro area. The overall effect on the US may be neutral.