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 article Download PDF More on this topic More by this author

Policy Contribution

Forecast errors and monetary policy normalisation in the euro area

What did we learn from the recent monetary policy normalisation experiences of Sweden, the United States and the United Kingdom? Zsolt Darvas consider the lessons and analyse the European Central Bank’s forecasting track record and possible factors that might explain the forecast errors.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 13, 2018
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Consequences of European Central Bank forecasting errors

Bruegel senior scholar Zsolt Darvas speaks about his review of systematic errors in ECB forecasting, in another instalment of the Deep Focus podcast on 'The Sound of Economics' channel

By: The Sound of Economics Date: December 12, 2018
Read article More by this author

Blog Post

Les gilets jaunes

For weeks, protesters wearing yellow motorist vests have taken to the streets of Paris to protest against the rising price of fuel. They have since taken on a wider role, and are seen as symbols of the growing popular discontent with President Macron. Silvia Merler reviews scholars’ opinions about this movement.

By: Silvia Merler Topic: Energy & Climate, European Macroeconomics & Governance Date: December 10, 2018
Read article More on this topic More by this author

Blog Post

ECB’s huge forecasting errors undermine credibility of current forecasts

In the past five years ECB forecasts have proven to be systematically incorrect: core inflation remained broadly stable at 1% despite the stubbornly predicted increase, while the unemployment rate fell faster than predicted. Such forecast errors, which are also inconsistent with each other, raise serious doubts about the reliability of the ECB’s current forecast of accelerating core inflation and necessitates a reflection on the inflation aim of the ECB.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2018
Read article More on this topic

Blog Post

The international role of the euro

The authors assess whether the euro area should pursue a greater international role for the euro, as outlined by European Commission president Jean-Claude Juncker, and how it might go about doing so.

By: Konstantinos Efstathiou and Francesco Papadia Topic: European Macroeconomics & Governance Date: December 3, 2018
Read article More by this author

Blog Post

Green central banking

A few weeks ago, Silvia Merler discussed the rise of “ethical investing”. A related question emerging from the discussion is whether central banks should also “go green”. Silvia reviews the latest developments and opinions on this topic.

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: December 3, 2018
Read article More on this topic More by this author

Blog Post

Machine learning and economics

Machine learning (ML), together with artificial intelligence (AI), is a hot topic. Economists have been looking into machine learning applications not only to obtain better prediction, but also for policy targeting. We review some of the contributions.

By: Silvia Merler Topic: Innovation & Competition Policy Date: November 29, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Shared prosperity for the EU and north Africa

Bruegel's director Guntram Wolff looks at north Africa's economic growth in the light of the region's trade agreements with the EU, welcoming Karim El Aynaoui and Uri Dadush to the Backstage series on 'The Sound of Economics'.

By: The Sound of Economics Topic: Global Economics & Governance Date: November 27, 2018
Read article Download PDF More on this topic

Policy Contribution

Assessing the European Union’s North Africa trade agreements

In this Policy Contribution, the authors provide an economic assessment of the trade agreements between the EU and North Africa. They argue that the common view of the agreements is overly negative, and point to policy conclusions that could increase regional integration.

By: Uri Dadush and Yana Myachenkova Topic: Global Economics & Governance Date: November 26, 2018
Read article Download PDF

Policy Contribution

European Parliament

A monetary policy framework for the European Central Bank to deal with uncertainty

In this Policy Contribution prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue, the authors review the emerging challenges to central banks, and propose an updated definition of price stability and an adequately refined monetary policy framework.

By: Grégory Claeys, Maria Demertzis and Jan Mazza Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 22, 2018
Read article More on this topic More by this author

Blog Post

The Brexit withdrawal agreement

On November 14th the UK government cabinet approved the draft text of the withdrawal agreement, the deal reached between EU and UK negotiators. The decision was followed the next day by the resignations of several members of Parliament. We review the first reactions in the blogosphere.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Blog Post

Is this time different? Reflections on recent emerging-market turbulence

Since the beginning of 2018, currencies of two large emerging-market economies – Argentina and Turkey – suffered from substantial depreciation. Other currencies also recorded losses. Which factors are determining macroeconomic and financial stability in emerging-market economies? And what can be done to prevent a crisis and avoid its economic, social and political costs?

By: Marek Dabrowski Topic: Global Economics & Governance Date: November 14, 2018
Load more posts