European Economy

Actually, Germany Hates the Undervalued Euro

Germany may benefit from the weak euro, but it really wants a stronger one.

In demand.

Photographer: Alexander Koerner

President Donald Trump and his appointees would seem to have it in for Germany. The latest evidence comes from Peter Navarro, head of Trump's new National Trade Council, who says Germany "exploits" its trading partners, both in the EU and in the U.S., using the "grossly undervalued" euro.

The claim smacks of a trade war in the making, and German Chancellor Angela Merkel felt compelled to answer it by saying her country couldn't "influence the behavior" of the European Central Bank, which is ultimately responsible for the euro's strength or weakness. But Navarro's statement deserves to be discussed in more depth because, like many things Trump himself has said, it contains just enough truth to be disturbing but not enough fully to make sense.

By most measures, from the half-serious Big Mac Index to purchasing power parity as measured by the Organization for Economic Cooperation and Development, the euro is indeed undervalued in relation to the U.S. dollar.

The Cheap Euro in Context

Percentage by which currencies are over- or undervalued in relation to the U.S. dollar by the OECD's purchasing power parity measure

Source: Data compiled by Bloomberg

The euro is the second most-traded currency in the world, so its exchange rate to the dollar is set by the markets in far more trades than any other currency, making it hard to blame Germany for any undervaluation. The euro's weakness is largely the result of the ECB's expansionary policies.

As Europe's biggest economy and its biggest exporter, Germany could theoretically benefit from the weak euro in the way Navarro says. It doesn't quite work like that, though.

Germany clearly benefits within the euro zone from having a currency that is weaker than a stand-alone German currency would be. Other euro zone countries get, in exchange, interest rates that are much lower than they would otherwise have had, enabling their large public debts to be serviced at low cost. But the weak euro is a facile explanation for German export success. Germany's exports to Switzerland (the country's ninth-biggest trade partner) are helped by the weak euro, but Poland (Germany's eighth-biggest trading partner) has a currency that is far more undervalued relative to the dollar. So do Hungary, Turkey, Japan and South Korea -- all top-20 destinations for German exports. Few countries with overvalued currencies are represented in the top 20.

To use Trump's trade terminology, Germany should "win" against the U.S. because of the common currency's undervaluation. The U.S. had an almost $60 billion trade deficit with Germany last year. But the exchange rate is not why the two nations' relationship is so skewed toward the European economic powerhouse.

Cars are the biggest German export to the U.S., accounting for 22 percent of the total goods export volume. But nobody buys German cars because they undercut the competition on price. On average, Germany sells the most expensive cars of all major automobile-producing nations.

Money Is No Object

Average sale price of cars by "nationality," in U.S. dollars, 2015

Sources: Data compiled by Bloomberg, author's calculations

* Toyota, Honda, Nissan, Suzuki, Mazda, Mitsubishi

In general, Germany's export structure is not geared toward price competition. The complex machinery, precision instruments and medications the country sells overseas aren't competitive because the euro is weak, but because they are often unique or because their producers' reputation, built over decades, draws buyers despite high prices.

U.S. administrations, international organizations and academics have argued before that Germany's huge trade surplus -- it likely overtook China's to become the world's biggest last year -- was the result of Germany's unfair advantage over weaker euro zone countries. Germany's objections that its exports kept growing because it had good stuff to sell were swept aside as disingenuous. But German politicians and economists really believe what they say. 

The best proof of their conviction lies in Germany's highly public resistance to the ECB measures that lead to the euro's weakening. The central bank's money-printing creates a political problem in Germany, a saver nation where 2 percent inflation -- the goal set by the ECB -- creates a negative real interest rate for bank depositors, the core of the politically and economically powerful German middle class. 

Inflation is up in the euro zone -- 1.8 percent throughout the common currency area in January and 1.9 percent in Germany. That has the anti-immigrant, anti-euro Alternative for Germany party up in arms, demanding "a stop" to the lax policies of ECB President Mario Draghi. 

Merkel and the conservative economists she listens to are equally unhappy. German representatives in the ECB keep pushing for higher interest rates and less bond purchases, and they keep getting outvoted. Recently, they have stepped up their calls for monetary tightening despite ECB objections that other euro members still needed help restarting economic growth.

In other words, Germany doesn't want a weak euro; it's hurting the German elite's chances of keeping political power, and that elite doesn't believe a stronger currency would hurt Germany's export-oriented economy. Accusing Germans of essentially weaponizing the undervalued euro is unfair, and it betrays either a knowledge gap or a desire to pick a fight regardless of the facts. The latter is more likely, given the Trump team's pugnacity on Europe.

Trump's people would like to see the euro fail. Ted Malloch, tipped to be the next U.S. ambassador to the European Union, recently said that the euro could "collapse" in the next 18 months. But if they expect even that would shrink Germany's trade surplus, they are probably in for a disappointment.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Leonid Bershidsky at

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