Germany: A Currency Manipulator?

The head of President Trump’s National Trade Council recently hit German political nerves when he branded Germany as a currency manipulator. Given that Germany is running persistently high current account surpluses that violate the Macroeconomic Imbalance Procedure of the EU and had been the object of quite a number of G-7 and G-20- meetings, such an allegation finds easily open ears, and also provokes the usual denial on the side of German politicians and news outlets. There is no doubt, current account surpluses can be the outcome of currency manipulation. For quite a while, the managed exchange rate policy of China, for example, could be branded as currency manipulation. In general terms, such a qualification requires that the central bank, either independently or in the name of a government, would deliberately use monetary policy tools and intervene in the foreign exchange markets in order to depreciate its currency: alternatively, or in addition, central banks and governments can use means of communication to put downward pressure on a currency.

In a formal sense, the US-Trade Facilitation and Trade Enforcement Act of 2015 provides us with three criteria that need to be fulfilled that a country qualifies as a currency manipulator towards the US: (i) a economic must be a major trading partner of the US; (ii) it must have a significant bilateral trade surplus; and (iii) a material current account surplus; and (iv) must engage in persistent one-sided foreign exchange market interventions. Following this line, the Treasury so far has not marked Germany as a currency manipulator. If the criteria are not getting changed under the Trump administration, then Germany will never be qualified as a currency manipulator. The reason is simple enough: Germany is part of a currency union and the ECB can’t and won’t act in the interest of a single country, and be this country Germany. As a matter of fact, the ECB has not – over the last few years – intervened into foreign exchange markets in order to secure a particular exchange rate. And this despite the fact that since 2010 the Eurozone experienced a capital flight that resulted in a depreciating of the Euro. This capital flight has not been caused by ECB policies but was the result of the various Eurozone crises and the ways they were managed. However, the bulk of the capital flight occurred within the Euro, and it was Germany that was the target of Euro-denominated inflows from the periphery. Without Germany acting as a stability haven within the Eurozone, the volume of capital flight to outside economies would have been large, and so would have been the depreciation of the Euro.

This does not mean that monetary policy of the ECB has no repercussions for the exchange rate of the Euro. In the most recent past, the Federal Reserve started its slow increase of its short-term lending rate and slowed its quantitative easing. Markets can expect a transition to a period where the Fed shrinks its expanded balance sheet. The ECB, on the other side, is stuck on the lower zero bound and only slightly reduced the volume of its bond buying program. Already this divergence should result in a weak Euro. Policy asymmetry is no unknown phenomenon. Immediately after the global financial crisis of 2008, the ECB actually increased the lead interest rate, whereas the Federal Reserve like other central banks went into the opposite direction. The appreciation of there Euro did not result in a shrinking of the German current account at the time, nor did the later convergence of monetary policies.

All those observations are actually irrelevant when it comes to qualify Germany as a currency manipulator. Currency manipulation requires by definition an actor who deliberately tries to depreciate the exchange rate of its currency against relevant economies. The ECB is not such an actor. However, oner can make the argument that the ECB willingly accepts the downward implications of its own monetary policies as well as of national governments of the Eurozone. Monetary policies and well as fiscal and structural policies of national governments of the Eurozone follow a strict mercantilistic logic that accept a depreciation of there Euro in order to create export-led growth. This strategy works successfully as the aggregated current account of the Eurozone shows: Eurozone Current Account 2006-2016



What about Germany? The argument made by Peter Navarro, one that actually also features prominent at the side of centre-left critics of Germany’s economic policy, makers the point that Germany’s social policy and more so its wage policy would be the core driver of its ‘over-competitiveness’ and thus be responsible for the weak Euro. The problem with this view is, that wages so far are not decided upon by ‘Germany’ nor by a German government. What needs to be shown ion the logic of the argument is that employers and trade unions deliberately negotiate wage increases that eventually improve the international price competitiveness of German export sectors.

Now, there is strong empirical evidence that real wages in Germany overall as well as in critical export sectors were below increases in labor productivity. Not only did this increase the profit share in GDP but it also had impact on the real effective exchange rates, based on manufacturing Unit Labor Cost for Germany which saw a steady decrease. As a consequence, international price competitiveness of German manufacturing improved.



This outcome is the result of two strong trends. First, trade unions in the manufacturing sector were following a negotiations strategy where modest nominal wage increases were offered in exchange for employment stability of its core members. Second, automatization and more so aggressive outsourcing policies of companies that make active use of the huge wage level differences within the EU created downward pressures on wages. All this is reflecting domestic practices and not any deliberate action on the side of the German government to devalue the Euro.

And yet, it would be naive to argue that Germany s not pushing for a economic policy project that willingly accepts a depreciation of the Euro. This project had for quite a long time during the crisis management cycle focused on austerity policies. Those policies resulted across the board in a reduction of effective demand, and in particular in a shrinking of the import volume of the Eurozone. The turnaround of the trade balance and the current account of the Eurozone speaks of the fact that the reduced import demand of the Eurozone is reflected in shrinking export volumes of its main trading partners. In a world with restricted capital mobility, such a turnaround would eventually lead to a appreciation of the Euro. As we know, this has not happened. The reason for the lack of adjustment can be found in global financial markets that still have serious doubts in the attractiveness and sustainability of the Euro, and are not in a position to direct significant flows into the Eurozone area. The planned deregulating of financial markets in the US is in a way a successful tool for ‘currency manipulation’ as it is a strong incentive for hot capital to move into there US, and thus to appreciate the US-Diollar. How this will help to make the US to a successful locus for manufacturing is something Peter Navarro will explain us soon.