The Corner

National Security & Defense

Germany, the Euro and Currency ‘Manipulation’

When it comes to recent comments on Germany from Peter Navarro, Donald Trump’s top trade adviser, (which are now causing some outrage across the Atlantic) there’s quite a bit to unpack, but when it comes to the advantage that Germany has taken of the euro, Navarro is right about effect, if not motive.

The Financial Times:

Germany is using a “grossly undervalued” euro to “exploit” the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy. Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main trading partners.

This  ‘implicit Deutsche Mark’ argued Navarro, is  “grossly undervalued”, and, as evidence of this, he cited “The German structural imbalance in trade with the rest of the EU and the US…”

This should not be controversial.

The euro has been bad for German democracy and for German savers and may well ultimately prove to be a disaster for its taxpayers too, but it has been a boon for the country’s exporters. The euro is far weaker than the Deutsche Mark would have been (as was always likely to have been the case). This means that Germany’s decision to abandon its old currency in favor of the euro has acted as a disguised devaluation, a devaluation that has only deepened as the structural imbalances within the common currency have dragged the euro down still further.

Writing in 2013, Paul Krugman, who’s not always wrong, noted that:

[I]f we imagine a euro breakup, I think everyone would agree that the new mark would soar in value, making German manufacturing much less competitive.

Indeed it would, which explains quite a bit of the opposition within Germany to such a breakup, or even, to as some (ahem) have suggested a unilateral departure of Germany from the  euro zone or a division of the common currency into ‘northern’ and ‘southern’ units.

In the meantime, German exporters have made the most of the opportunity, with sometimes severe consequences for their competitors.

That said, this was (for them) a happy accident rather than the result of any cunning plan. The crucial Franco-German push for the euro came after the fall of the Berlin Wall. To France’s President Mitterrand a common currency was seen as a way of anchoring a united Germany within the EU and (ironically) as a device to contain Germany’s relative  economic strength. To Germany’s Chancellor Kohl a commitment to join the single currency was seen (nuttily) as a price to be paid to secure agreement to German reunification and as a  reassuring message that there was nothing to fear from a united Germany. If there was an ‘international’ economic ambition behind the creation of the euro, it was that those steering the project of European integration wanted a reserve currency of their own to challenge the dollar.  Giving German exporters a windfall was not a part of the plan.