©Javier Micora/ Flickr.com (CC BY-NC 2.0)

In late January Peter Navarro, the Head of Trump’s new National Trade Council, said the euro’s low valuation was giving Germany an edge over the US and its EU partners. He described the single currency as an “implicit Deutsche Mark”.
We can observe, from the chart provided by Yahoo-Finance that the Euro has fallen nearly 25 percent against the Dollar over the past three years, touching a 14-year low of $1.034/€, but it has since risen over $1.05/€.

Figure 1: Euro depreciates against the dollar, 2014-2017. Source: Yahoo Finance

So a couple of days after this declaration, at the Munich Security Conference, the German Chancellor Angela Merkel remarked the previous declarations, specifically by stating that Germany can not be held responsible for the highest German trade surplus and for the undervalued Euro.
The Chancellor admitted the existence of a problem about the value of the euro, but it is not attributable to German responsibilities. “The European Central Bank has a monetary policy that is not geared to Germany, rather it is tailored to countries such as Portugal or Slovenia or Slovakia. If we still had the German Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German Chancellor”.

Figure 2: German surplus from 2002 to 2016. Source: Destatis.

These are clearly words crafted at art in order to exonerate herself and reply to Navarro’s declarations. However, a few days later, Germany revealed a trade surplus of 252.9 billion, the highest surplus since World War II. Meanwhile the situation is completely different in the US, which is registering a huge trade deficit.

Figure 3: US deficit from 2006 to 2016. Source: US Census Bureau; Bureau of Economic Analysis.

Of course, we cannot forget the presence of other important players in this game. The problem related to this amazing trade surplus was also pointed out by other important institutions like the Obama administration, the International Monetary Fund (IMF) and the European Commission, but Angela Merkel always justified the problem by supporting the idea of a Germany like “new Japan”, i.e. a country where savings are very high due to the demographic development.  However, savings is just one of the deep structural reason of the Teutonic surplus. The creation of the Euro eliminated the exchange rate risk, and reduced financial transaction costs across member countries in the European Union.
The German surplus reflects a succession of distinct shocks. The most important factors driving the German surplus were positive shocks to German saving rate and to the rest of the world demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. Those shocks had a noticeable negative effect on the rest of the Europe net export, proof that what can benefit the one might not be so convenient to the many.
It is true that the ECB is independent, and it can be confirmed in the Status of the ECB itself. When performing Euro-system related tasks, neither the ECB, nor any member of the decision-making bodies may seek or take instruction from any external body. However, it has been shown that in the Union, in particular, small countries are in a vulnerable position, as the ECB tends to take care about the average output of the union, responding to supply and demand shocks. Life within the monetary union is much easier for the largest countries, like Germany. They also have more power in the European Institutions. Therefore, it is as good a hypothesis as any, the one where we can perceive a cunning streak in the mind of German persons of interest in the matters of economy.
To summarise, Germany manipulates indirectly the Euro. It theoretically influences the ECB, which acts in a manner to keep the single currency lower than the real level. There is no clear method of establishing how much a currency is under or overvalued –and perhaps this is a further advantage used by Germany to benefit the country-, but economists think that some economic measures show the German economy could easily cope with a stronger euro. The single currency could be a bit stronger also for Germany. If the Germany were to leave the euro-area, German exports would become more expensive and German imports cheaper, thus reducing the German current account surplus.


Leave a Reply