currency manipulations Admit It, The Low Euro Helps

A recent statement by Peter Navarro, a Trump-appointed economist, about the German trade surplus was seen as controversial and undiplomatic. But there is some truth to it and it’s time Germans faced up to that.
Quelle: Bloomberg
Germany respects the independence of the European Central Bank, Angela Merkel said, and is unable to influence the euro exchange rate.

It would be easy to dismiss this criticism as yet more mad raving from the motley crew Donald Trump calls his policy-making team. Peter Navarro, head of the National Trade Council created by Mr. Trump, recently accused Germany of achieving its export successes with a currency that has been artificially undervalued. He said the "grossly undervalued" euro is nothing but an "implicit Deutsche Mark."

Mr. Navarro is an outsider among economists. He is one of the few to question the economic dogma whereby free trade increases the prosperity of all participating nations. It was only his support for Mr. Trump that catapulted Mr. Navarro, a relatively unknown professor until then, to the top echelons of those making U.S. trade policy.

His criticism is clearly an exaggeration.

The German export surplus has already assumed pathological dimensions – and this sickness does have something to do with the low euro.

Especially the part where Mr. Navarro accuses Germany of deliberately pushing down the euro exchange rate. That is completely untrue, which explains German Chancellor Angela Merkel's calm reaction to the criticism from Washington. Germany respects the independence of the European Central Bank and is unable to influence the euro exchange rate, she said.

Ralph Brinkhaus, deputy chairman of the Christian Democratic Party's parliamentary group in the German Bundestag, seconded the chancellor, saying that Germany's export successes are primarily the result of "good products and competitive companies."

But that attitude is almost as dodgy as Mr. Navarro's statements. By touting the dramatic export surplus as proof of the country's performance, Germans are essentially saying: Can we help it that we build better cars and machines than the rest of the world?

But the fact is that the German export surplus has already assumed pathological dimensions – and this sickness does indeed have something to do with the low price of the euro.

The undervaluation that occurs as a result of the ECB's relaxed monetary policy should also be taken into account. In terms of purchasing power parity, the euro sits about 20 percent lower than the dollar. It may not be Germany’s plan when ECB President Mario Draghi keeps down interest rates, and therefore the exchange rate, but it does help German exports.

This currency effect becomes even more blatant if we consider what would have happened to the exchange rate of the Deutsche Mark in recent years if it had continued to exist. In light of Germany's massive trade surpluses, this German currency would presumably have appreciated. In other words, prices of German exports are reduced because the euro-dollar exchange rate does not reflect the boom; it reflects the situation in the rest of the euro zone.

The rest of the world realized long ago that it was not just German engineering ingenuity stimulating the country's exports. Other countries can’t comprehend the strange mixture of nonchalance and pride with which German politicians keep talking about record export figures. But the truth is that a surplus of this magnitude is not proof of strength, but of weakness.

With every euro of additional product value Germany exports instead of imports, the country exports the same amount of valuable capital, capital that Germany sorely needs to build new factories and research facilities. Germany's investment weakness is a mirror image of our export strength.

The defenders of the German current account surplus like to use the aging society as an argument, saying that Germans are helping to secure their futures by using their savings to buy rights to the future output of other economies, to provide themselves with retirement income. The argument is correct.

However the International Monetary Fund says that argument only justifies a surplus of 5.5 percent and no more. That’s obviously significantly less than the current surplus of just under 9 percent. This means that, by all reasonable standards, the German current account surplus is too high. It harms the Germans more than the Americans, or any other nations.

When the German government flouts its painstakingly balanced budget and incurs new debt to build new roads, in order to somehow drive up investments, that does little to help the problem. Under current conditions, the government's role in this game is not that important anyway. Almost 90 percent of gross fixed capital investment comes from the private sector, mostly from companies.

According to the German Council of Economic Experts, important obstacles to investment for this clientele include high energy costs and the lack of skilled workers. These are not factors that can be changed overnight, but they should not simply be accepted either.

They say that self-awareness - accepting your own faults - is the first step toward recovery. Even if his motives were a far cry from helpful to Germany, perhaps Mr. Navarro's criticism will assist us in the process.


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