Do we really want a currency war with Germany?
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There is considerable merit to the Trump administration's charges that Germany has used the euro to gain an unfair competitive advantage for its export sector. However, one has to wonder how much thought the administration has given as to what should be done about Germany's very large trade surplus.

It is also far from clear that the administration is taking into consideration both the economic and political risks of adopting a high-handed approach to Germany's economic imbalances. This is especially the case ahead of Germany's parliamentary elections, scheduled for September.

It is not difficult to make the case that Germany's EU membership has enormously benefited its export sector. Outside of the euro, Germany's currency would have soared to reflect the large improvements in that country's labor productivity since the euro's launch in 1999.

However, with euro, Germany has benefited from a cheap currency that has been dragged down by the poor productivity performance of euro member countries like Greece, Italy and Portugal.

Another way of making the case that Germany has benefited from the euro is simply looking at the marked improvement in its trade balance. Today, Germany is running a surplus in its trade of goods and services of almost 9 percent of gross domestic product (GDP) at a time when a much-maligned Chinese economy is running an equivalent surplus of only around 3 percent of GDP.


Germany's very large trade surplus essentially implies that the rest of the world is boosting the German economy through the purchase of its exports to a much greater degree than Germany is boosting the rest of the world's economy through the purchase of the rest of the world's exports.


It is one thing to note that Germany has benefited from a cheap euro that has contributed to its large trade imbalance. It is quite another matter to come up with a coherent strategy to address that imbalance. Sadly, the new administration has yet to offer any real solution to this problem, other than trying to talk down the dollar.

Worse yet, it seems to be proposing domestic budget policies that would all too likely exacerbate the German imbalance problem.

A crucial point that the new administration chooses to ignore is that Germany does not have a currency of its own and that any move to have Germany leave the euro would almost certainly trigger a major global financial crisis. It would do so by inducing a wave of European sovereign debt defaults as interest rates in Southern Europe would almost certainly rise substantially in the wake of the euro's unraveling.

The administration also seems to overlook that while a large euro appreciation might help to address Germany's large trade surplus, it would at the same time threaten the fragile economic recovery in Europe's troubled economic periphery. That, in turn, must be expected to exacerbate the serious debt problems of those countries.

A more basic point that the new U.S. administration chooses to ignore is that a country's trade balance is essentially the difference between the amount that it saves and the amount that it invests. Had it recognized this point, it would have now been pushing Germany to use the fiscal room it has to both boost the European economy and reduce Germany's excessive degree of saving that is giving rise to its very large trade surplus.

By the same token, if the Trump administration was serious about helping to redress Germany's large bilateral trade surplus with the United States, it would not now be proposing at home a highly expansionary budget policy at a time of full employment. Such a budget policy approach is bound to cause a decline in U.S. public savings and a rise in investment.

That would only cause the balance to deteriorate.

One also has to question the wisdom of the timing of the Trump administration's offensive against Germany. It comes at a time when German politics are showing clear signs of fragmentation and the German electoral campaign is now getting underway.

This leaves German Chancellor Angela Merkel politically very exposed with little room for compromise with the United States.

It also risks further radicalizing German politics.

One has to hope that the Trump administration soon backs off from its broadside against Germany and seeks instead to engage the Germans in a constructive dialogue about the sensible coordination of those two countries' macroeconomic policies.

If not, we should brace ourselves for some rough sledding in the global economy as the U.S. and Germany drift toward beggar-my-neighbor policies.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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