Call Germany a Currency Manipulator All You Want; It Won't Change Things

 | Feb 16, 2017 | 8:00 AM EST
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In his quest for enemies of the dollar, President Donald Trump included Germany on the list of countries that deliberately keep their currencies low to gain a foreign exchange advantage versus the U.S. and to cheapen their goods on the international scene.

Let's forget for a moment that for years the Fed's ultra-easy monetary policy has kept the U.S. dollar at incredibly weak levels for such a strong economy. Let's also forget for now that Germany doesn't have its own currency, as it shares the euro with 18 other states. How much truth is in the statement that it manipulates its currency? Let's start by looking at trade.

Trade figures for the "vehicle for Germany" -- as President Trump called the European Union in an interview last month -- show that the EU's trade surplus with the rest of the world actually shrank last year. The 2016 surplus was €39.3 billion ($41.6 billion), 34% lower than 2015's €59.9 billion surplus, data released on Wednesday by Eurostat show.

However, the 19-member eurozone's trade surplus jumped by 15% last year compared with 2015. The single currency area's surplus in trade in goods was €28.1 billion ($29.8 billion) in December last year, up from €24.4 billion in December 2015.

The main alleged "culprit" for this, of course, is Germany. The German trade surplus hit a record high of €257.3 billion last year, exceeding 2015's €248.2 billion. Its current account surplus -- which besides trade in goods also includes trade in services and investment flows -- hit the equivalent of around $284 billion, exceeding China's surplus.

This seems to justify the statement made by Trump's trade advisor, Peter Navarro, who at the end of last month said Germany was using the "grossly undervalued" euro as an "implicit Deutsche Mark" to "exploit" the U.S. and its other EU trading partners.

While the euro is certainly too weak for Germany's economy -- a point that the German Finance Minister Wolfgang Schaeuble agreed on -- the currency is not the only thing that has made Germany competitive, and it is not the only driver of the trade surplus.

If it were, Italy -- which almost all analysts agree needs a weaker currency -- would post a deep trade deficit, while the U.K., which has its own currency and has devalued it after the 2007-2009 financial crisis, would post a wide trade surplus.

Instead, Italy's trade surplus increased last year to €51.6 billion, a 23% jump from 2015. Its surplus with other EU countries climbed 36%, while its surplus with non-EU states increased by 20%. The U.K., by contrast, has a huge trade deficit, equal to around 5% of GDP.

A Real Money subscriber noted in an email to me a while ago that Germany's trade surplus is illegal. While that may be too strong a word, it is true that in 2011 the European Union introduced a so-called macroeconomic imbalance procedure (MIP) to identify and address member states' potentially harmful macroeconomic imbalances.

On foreign trade, a country is said to be in the MIP if its three-year average current account balance as a percentage of GDP is either higher than 6% of GDP or lower than 4% of GDP. Germany has been in breach of these criteria at least since 2013. A new EU report on this is due sometime before the end of February, but we can be sure that Germany will be considered to have been in breach for 2016 as well.

But don't expect this finding to change things. Last year's report cited some measures that Germany could take to improve the situation. Raising wages, investing in infrastructure and integrating the refugees were some of these, and the country has taken them.

Other causes of the high surplus are more entrenched, and therefore harder to change. The Germans' predisposition to save, rather than spend, even in the face of severe financial repression (interest rates are at historic lows, even negative in real terms), is something that no government has managed to break.

Corporate tax is still high, while bureaucracy and regulations are more prevalent than in a country such as the U.K., for instance, making it more difficult for private companies to invest and boost domestic consumption. On that side of the equation, there is little appetite for change, too.

As is always the case in the EU, the most likely scenario is that policymakers will try to muddle through. There are various levels of imbalances under MIP: those that only need monitoring are just "imbalances"; "excessive imbalances with corrective action" are where corrective action is recommended by the European Commission.

Germany falls in a category for which only monitoring is needed. Don't expect that to change this year, with elections in Germany looming.

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