The U.S. government is exerting pressure and painting a blatantly distorted picture of German economic policy. But it is also true that Berlin has ignored smoldering problems for far too long.
It is getting serious. After months of vague, trade-related threats from the U.S., opposing parties will meet each for the first time:
• Angela Merkel will meet U.S. President Donald Trump in Washington on Tuesday;
• Wolfgang Schäuble will receive his new American counterpart Steven Mnuchin in Berlin on Thursday; and
• on Friday and Saturday, both will then take part in the meeting of finance secretaries and federal bankers of the Group of 20 leading rich and developing nations in Baden-Baden.
In the meantime, the Federal Reserve will also set its course:
• On Wednesday, the head of the Federal Reserve, Janet Yellen, is likely to announce another rate hike and possibly a quicker tightening of U.S. monetary policy, which could further fuel the trade policy conflict.*
A lot is at stake. The relationship between Germany and its most important trading partner, a significant part of the business of various German companies, and ultimately the stability of global trade.
Euro Artificially Low
The Trump administration has repeatedly and sharply criticized the German government for acting unfairly toward the United States. Germany is accused of keeping the euro artificially low, thereby gaining competitive advantages. In any case, the export surplus of around 50 billion euros would have to be reduced in America’s favor. The vague announcement has been made that countries with trade surpluses are to be punished with penalties. Congress, on the other hand, is considering a new business tax, which would make imports more expensive and exports tax-free.
There is much to discuss this week. And it has to be noted, Trump and his people are painting a blatantly distorted image of German trade policies. But German trade policies have ignored the smoldering problems for far too long. From that point of view, this is a conflict that comes with an announcement.
First of all, there is the surplus. Since the early euro years, Germany has recorded a structural foreign trade surplus, which has grown steadily. It now stands at more than 8 percent of the German aggregate output. That is a problem in the long run; Germany is saving more than it is investing.
In other words, if Germany invests surplus savings in other countries, the debt burden will increase there. And if far more is exported than is imported over the long term, there will be constant complaints about this imbalance – from the U.S. (already heard during Barack Obama’s tenure, by the way), from the euro partners, and from the European Commission.
This Much Is True: We Have a Problem
It used to be thus: As long as the Federal Republic had a currency of its own, large surpluses quickly receded. The mark would have appreciated long ago and a part of the competitive advantage would have been lost. Within the currency union, however, there is a uniform exchange rate that is currently too low for German conditions, which is why the current account surplus is continuously reaching new heights.
And the euro has been especially weak since the European Central Bank began a bond-purchasing program (quantitative easing) two years ago worth billions. However, the ECB has set up its program against stated German resistance. To this extent, the accusation that the Federal Republic is manipulating the common currency in its favor is absurd.
Is Germany ultimately innocent in the conflict? Are we merely victims of Team Trump’s protectionist assailants?
The overall picture also includes the fact that politicians, managers, and economists in Germany have pushed aside the allegations over the long term because of the structural foreign trade surplus. They adhere to the motto: It’s not our problem if our export industries are so good. The fact that other mechanisms have to be introduced in the eurozone in order to compensate for large permanent imbalances is still not an economic issue in Germany.
On the contrary. Since the outbreak of the euro crisis, the federal government has pressed the other member states to follow Germany’s path. Every country should improve competitiveness for itself and be buoyed from their debt miseries by external surpluses. The strategy has certainly worked; former states in crisis, which once had high deficits, now export more than they import.
The whole eurozone is registering massive surpluses.
In sum, the consequences are quite problematic. The eurozone as a whole, which had a roughly balanced current account in the 2000s, is now experiencing a massive surplus. At 365 billion euros (approximately $394 billion at current exchange rate), it was most recently 3.4 percent of the common aggregate output. It is therefore the economy with the highest surplus among the large economic areas of the world, much larger than China’s.
What may work for small countries – for example, the Asian economies set up a similar strategy after the financial crisis in the late 1990s – is difficult for an economic region the size of Europe. The resulting global imbalances are an economic-political explosive; the Trump government is now lighting the fuse.
Actually, the eurozone needs a major overhaul. To overcome its internal economic tensions, it would need internal mechanisms: a collective eurozone budget, for example, the completion of the European Banking Union, and similar other measures. A good overview of this is provided, for example, by last year’s eurozone report from the International Monetary Fund. With Germany, however, all these measures could not – and cannot – be accomplished. The possible global economic repercussions of these institutional deficits have been neglected.
No Reliance On Global Trade Policies
The emerging trade policy conflict with the U.S. now shows the two are related. Without internal adjustment mechanisms within the eurozone, the internationally strong position of German industry could ultimately be lost if German imports were to be affected by penalties or discriminatory import taxes. To rely on the absence of such sanctions before the WTO is illusory. If in doubt, the Trump administration is unlikely to adhere to global trade policy rules.
This conflict is also fueled by the central banks. As the Fed gradually pushes interest rates up while the ECB continues to keep rates at zero and buys bonds, the dollar may become even stronger in the near future. The imbalances in trade policy are thus even greater; America’s deficit is growing, as is Germany’s surplus. The U.S. administration will see this as further proof of currency manipulation.
It is not enough to find Trump’s rhetoric unacceptable and his approach dangerous – both apply. In the end, Europe will also need to act.
The most important economic appointments of the coming week.
Stuttgart: Economic upper class – Continuation of ex-pharmacy king Anton Schlecker trial for deliberate bankruptcy.
Washington: Merkel’s delicate mission. The chancellor will meet Trump at the White House for the first time. There is much to discuss with him: NATO, Russia, Syria, Europe, trade.
Wolfsburg: In service of diesel – Volkswagen presents its numbers for fiscal year 2016.
Beijing: Sweet and sour economics – The Statistics Office of the People’s Republic presents official numbers on economic growth in February.
Frankfurt: Comrades in the shadow of zero interest – Annual press conference of the National Association of German Cooperative Banks on business development in 2016. Like the savings banks, low interest rates also threaten to destabilize the small cooperative banks.
The Hague: Wilder’s Wild West – The Dutch elect a new parliament. All are focused on the performance of the right wing populist Geert Wilders, who has succeeded in shifting the whole party spectrum to the right.**
Washington: Fuel for the dollar – The Board of Governors of the U.S. Federal Reserve makes its decision on monetary policy known. Presumably a rate hike. Possibly followed by a further appreciation of the dollar. President Trump is unlikely to be amused.
Paris: Trance en France – The conservative presidential candidate François Fillon has to appear before investigating magistrates who are expected to open an investigation. He is alleged to have fraudulently hired his wife at the expense of parliament. The time for him to step down as candidate has long since passed.
Berlin: Hard bandages – Federal Treasury Minister Schäuble will receive his U.S. counterpart, U.S. Treasury Secretary Steve Mnuchin. The Europeans are vehemently opposed to U.S. plans to strengthen its business tax with a border adjustment.
Berlin: Zero, zero, one – Top representatives of the G-20 nations discuss the global effects of a digitized industry. Also attending: Competition Commissioner Vestager, Post-Chief Appel and Minister of Economic Affairs Zypries.
Baden-Baden: Freedom, that’s just some people talking – The finance ministers and central bankers of the G-20 nations are meeting under the German chairmanship. Ultimately, it is a question of whether global agreements can still exist in a time of increasing national reflection.
Berlin: Standard joke – Meeting of the Supervisory Board of the airport company Berlin-Brandenburg.
Baden-Baden: Freedom, II – Conclusion of the G-20 meeting.
Hanover: Digital business – Opening of the information technology fair CeBIT. With Merkel and Japan’s premier Abe.
Berlin: Super Martin’s inauguration – Martin Schulz is elected party leader at the Social Democratic Party’s special party conference and is nominated as a candidate for chancellor.
*Editor’s note: This article was published prior to the meeting between Chancellor Merkel and President Trump in Washington, D.C. on Mar. 17 and prior to additional meetings discussed.
**Editor’s note: The Dutch general election was held Mar. 15 and Mark Rutte was re-elected prime minister fending off a challenge from Wilders.