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Old wine in a new bottle

Wenkel Rolf Kommentarbild App
Rolf Wenkel
February 2, 2017

An adviser to President Trump says the euro served as a currency for Germany alone, allowing it to "exploit" its EU partners and the US. Is it worthwhile to confront this nonsense with facts? asks DW's Rolf Wenkel.

Symbolbild niedrige Inflation in der Eurozone
Image: picture-alliance/dpa/J. Büttner

The old accusations are being levelled once again, but they have taken on a different tone. In an interview with the British business daily Financial Times, Peter Navarro, a senior adviser to the new US President Donald Trump, accused Germany of unfairly profiting from the "grossly undervalued" euro, at the expense of the nation's European partners and the US. Germany is exploiting these countries with an "implicit Deutsche Mark," he said.

Such allegations are not new. They have been raised many times before, by US economists, officials like the head of the International Monetary Fund, Christine Lagarde, and even Trump's predecessor, President Barack Obama.

It has to be stressed, though, that repeating such accusations again and again doesn't make them any truer.

German Chancellor Angela Merkel on Tuesday already issued a decisive riposte to Navarro's claims, pointing out that it's not Germany that is responsible for the depreciation of the value of the euro vis-à-vis the dollar. "As far as the question of the euro and its assessment is concerned, Germany is a country that has always promoted the European Central Bank to make an independent policy, as did the Bundesbank when there was no euro," Merkel said.

"Therefore, we will have no influence over the choices made by the ECB. So I cannot either, in the situation as it is, and I do not want to change anything."

It's Draghi's turf

Of course, the ECB's actions have contributed strongly to the decline in the euro exchange rate. The central bank is implementing a zero-interest-rate policy, which is heavily criticized by German savers.

Wenkel Rolf Kommentarbild App
DW's Rolf Wenkel

The ECB is pumping gigantic sums of money into the economic system, in a bid to buy time for countries like France and Italy that have been unable to reform their troubled economies. The massive money printing, without doubt, puts downward pressure on the currency value.

And this development, in fact, has the side effect of making German products relatively cheaper and gain competitive advantage on the global market. But this has never been the intention of the ECB, only an unintended consequence of its ultralow interest rate policy.

Moreover, German exporters have never solely relied on exchange rate factors to sell their products on the world market. It can be observed in the fact that they have managed to sell their goods even during times when the euro has been extremely strong against the dollar.

The secret behind the German exporters' success lies not just in their products' price, but also their quality. It's unfair and counterproductive to ask German automakers and machine manufacturers to produce poorer quality products, just to redress the issue of global trade imbalances and appease egomaniacs with a rather strange understanding of economics and trade relations.

Sharing the blame

Meanwhile, the US too has contributed to the strength of the dollar and the weakness of the euro. The Federal Reserve's moves to hike interest rates have pushed the value of the dollar upwards. And the US central bank is expected to raise rates at least three times this year, which will widen the monetary divergence between the two currencies and likely push the euro to below the dollar parity.

This would not be the first time that the value of the euro would sink below that of the dollar. There was a time when one euro fetched just $95 cents, a time when Greece claimed that it met the criteria to join the euro currency and became member of the eurozone on January 1, 2001.

In retrospect, that was a decision that did the southern European country no favor. Furthermore, there was no talk at the time of the Europeans, particularly the Germans, gaining an unfair competitive advantage by adopting the euro. 

The question now is whether or not this exchange rate dynamic will continue and if it does, then for how long. The other factor to focus on is its medium- and long-term implications.

Unfortunately, the ECB's interest rate outlook and its flooding of money into the markets, which is likely to continue unabatedly at least until the end of 2017, will increase the monetary policy divergence between the eurozone and the US. But it has to be stressed once again that neither the German government nor the Bundesbank are involved in the setting of the ECB's loose money policy.

There's no doubt that Trump is irritated by the US' gargantuan trade deficit. This deficit, however, is the result of not only exchange rates, but also the deeply consumerist nature of US society. In fact, the US' public debt has soared by almost $10 trillion in the last eight years alone.  

Trump views competition on the global market as nothing but a struggle and a zero-sum game, where one has to lose for the other to win. That Germany is targeted by the US president and his advisors should be regarded as a compliment for the EU nation.

And the federal government in Berlin is well-advised to ignore the rhetoric emanating from Washington as the accusations coming from the other side of the Atlantic are simply erroneous and absurd.

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