Blog Post

Is Germany a currency manipulator?

What’s at stake: the Financial Times reports that Peter Navarro, head of the US’s National Trade Council, has accused Germany of currency manipulation. He claims that the country uses a 'grossly undervalued' Euro to 'exploit' its trading partners. Angela Merkel replied that the Euro is managed by the European Central Bank, on which Germany does not exert influence. We review what the economic blogosphere thinks of this.

By: Date: February 6, 2017 Topic: Global Economics & Governance

Paul Krugman argues that Navarro is right and wrong at the same time. Germany in effect has an undervalued currency relative to what it would have without the euro, against its neighbors. This is the result of a large real depreciation during the euro’s good years, which has only been partly reversed, because wages are downward sticky, and Germany has refused to support the kind of monetary and fiscal stimulus that would raise overall euro area inflation, which remains stuck at far too low a level. But this does does not necessarily mean that the euro as a whole is undervalued against the dollar. The euro is weak, but there’s no clear relationship between the problems of Germany’s role within the euro and questions about the relationship between the euro and other currencies.

Jeromin Zettelmeyer at PIIE argues that Navarro’s comments are worrisome because of two assertions he made earlier in September 2016, both of which seem to underpin the thinking behind his criticism of Germany. First, that freely floating currencies would eliminate trade imbalances – and by extension, that trade imbalances are a manifestation of “currency manipulation.” Second, that Germany’s euro membership, as a policy choice that keeps Germany’s exchange rate undervalued, is an act of currency manipulation. Both these assertions are incorrect.

On the first point, freely floating currencies are consistent with large, persistent deviations from trade and current account balance. This is because freely floating exchange rates are shaped not only by currency supply and demand associated with trade, but also by currency supply and demand associated with investment flows.

On the second, the Euro’s undervaluation today is largely a consequence of the euro crisis. So the assertion that German euro membership constitutes currency manipulation is baseless for two reasons: Euro membership did not reflect any decision, on behalf of the German government, to steer its exchange rate. Nor is Germany’s competitiveness a structural feature of euro membership. Euro membership merely implies that the real exchange rate takes longer to adjust to shocks than would be the case in a floating system.

Frances Coppola says that Navarro is wrong, but Merkel misses the point. Navarro is not saying that Germany directly influences the Euro’s exchange rate, but that the weakness of the southern European economies in the European Monetary Union holds the Euro at a lower exchange rate than the Deutschmark would have as a freestanding currency. Coppola argues that this argument is fallacious, and by refusing to regard the Eurozone as a single bloc, Navarro wilfully misinterprets the relationship between Germany’s trade balance and the exchange rate of the Euro.

The Euro is indeed undervalued for Germany, but it is also overvalued for other countries in the bloc. If the bloc were to break up, Germany’s restored currency would appreciate, but other restored currencies would depreciate. Overall, the US would gain very little. So – Coppola  concludes – although Navarro appears to deny the reality of the Eurozone, he does not actually want it to break up. Moreover, he is the one who is de facto demanding currency manipulation, as what he wants is for the Euro to be artificially maintained far above its market level to benefit the US at the expense of Germany.

Matthew Klein at the FT argues that the US should blame Germany – rather than Mexico – for “losing” at trade. He argues that American (and British) “profligacy” is the result of the rest of the world’s unwillingness to spend more. From this perspective, any negotiator committed to putting “America first” should focus exclusively on those countries with the largest current account surpluses, since those are the ones putting the most pressure on America’s trade balance. Moreover, negotiators should be pressuring those countries to make policy changes that would increase the purchasing power of their domestic consumers, since that is the most durable and effective way to aid American exporters and reduce the importance of debt. Looking at the world today, those countries do not include Mexico, but rather Germany, China, Japan, Korea, Taiwan, the Netherlands, Switzerland, and Singapore. Among them, American negotiators should focus the bulk of their energy on the euro area and on its recent current account surplus.

Laurence Kotlikoff writes on Forbes that Peter Navarro needs a refresher course in economics. Germany is part of the Eurozone, any intervention in exchange markets is done by the ECB, and while Germany has a big influence on the ECB, it doesn’t dictate ECB exchange-rate policy. Moreover, there is no ground to argue currency manipulation by the ECB based on money supply data. The Federal Reserve has been supplying far more Dollars than the ECB has been over the past decade: Fed’s supply of money grew by a factor of 4.3 since 2007, and the comparable factor for the ECB is roughly 3.5. For Japan it’s 1.3. And for China, it’s 2.4. So if any of these regions has spent the last decade trying devalue and, thus, manipulate its currency to make its goods cheap, it’s the US.

Kotlikoff argues that the demand for Dollars relative to Euros has played an even stronger role than has the relative supply of the two currencies. Over the period, the Dollar appreciated 34 percent against the Euro, appreciated 5 percent against the Japanese Yen, and depreciated only 6 percent against the Chinese Yuan. Demand for the Dollar has been strong thanks to the US’ more rapid recovery from the Great Recession, Southern Europe’s near depression-like condition, Japan’s slow growth, China’s slowing growth, the perception that the US is a safe haven and, recently, Brexit.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Feb
27
12:30

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series will look into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The exchange rate and inflation in the euro-area: words following facts

The reduced references in the speeches of the President and Vice-president of the ECB to exchange rate changes in assessing inflation developments correspond to a decreased pass-through from the exchange rate to inflation. So, as it should be, words have followed facts

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: February 16, 2018
Read article More on this topic More by this author

Blog Post

Is it a Transatlantic, Transpacific or Eurasian global economy?

A look at the data on bilateral trade, services, investment and protectionism between Asia, Europe and the US in recent years gives some indication of the future shape of the world economy.

By: Nicolas Moës Topic: Global Economics & Governance Date: February 14, 2018
Read article More on this topic More by this author

Blog Post

Economies of States, Economies of Cities

Both in Europe and the US, economists are starting to notice how the economies of cities have been sometimes diverging from the economies of states. While some areas thrive, others may be permanently left behind. Maybe it is time to adopt a more clearly sub-national perspective. We review recent contributions on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: February 5, 2018
Read article More on this topic More by this author

Blog Post

Rebuilding macroeconomics: Initial reflections on a major theory project

The ‘Rebuilding Macroeconomic Theory Project’ came to an end in the most recent volume of the Oxford Review of Economic Policy; how were the various papers’ conclusions received?

By: Konstantinos Efstathiou Topic: Global Economics & Governance Date: January 29, 2018
Read article Download PDF More on this topic

Working Paper

Will macroprudential policy counteract monetary policy’s effects on financial stability?

How does monetary policy impact upon macroprudential regulation? What are the effects on financial stability? This working paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem.

By: Itai Agur and Maria Demertzis Topic: Finance & Financial Regulation Date: January 24, 2018
Read article More on this topic More by this author

Blog Post

Macroprudential policy: The Maginot line of financial stability

The ability of macroprudential policies to assure financial stability and thus leave central banks free to assign the interest rate tool exclusively to price stability is unproven. As the Maginot line did not protect France from a German invasion in WWII, so macroprudential policy may not be sufficient to counter financial instability. Central banks should prepare to deal with dilemmas in the use of the interest rate.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article More on this topic More by this author

Blog Post

A few good (wo)men – on the representation of women in economics

Last week, the American Economics Association Annual Meetings held a session on Gender Issues in Economics and later announced that a new code of professional conduct is in the pipeline. In this blogs review we revise the recent contributions on female representation and perception in economics.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: January 15, 2018
Read article More on this topic More by this author

Opinion

Opportunities and risks in Europe in 2018

The new year could very well see the positive story of 2017 continue in Europe – but a number of looming policy and political problems cannot be ignored.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 30, 2017
Read article

Opinion

Chinese banks’ improved asset quality cannot hide other phantoms

The recent improvement in asset quality cannot mask other growing concerns in China’s banking sector. Beyond liquidity concerns, other structural issues such as low profitability and insufficient generation of organic capital, are emerging.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 20, 2017
Read article More on this topic More by this author

Blog Post

The Republican Tax Plan (2): The debate rumbles on

Reactions to the Republican tax plans continue, concentrating on different aspects of the proposed legislation. We review the latest contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: December 18, 2017
Read article More on this topic

Blog Post

Brexit, phase two (and beyond): The future of the EU-UK relationship

Whether it looks more like ‘CETA-plus’ or ‘EEA-minus’, the trade deal that emerges from phase two of the Brexit negotiations should not be the limit of ambition for future partnership between the EU and the UK

By: Maria Demertzis and André Sapir Topic: European Macroeconomics & Governance Date: December 13, 2017
Load more posts