Patrik Stollarz/AFP/Getty Images

President Trump’s Necessary German Lessons

Donald Trump has criticized Germany’s enormous current-account surplus, which he considers the result of German currency manipulation. But Trump is wrong: while Germany’s external surplus, at 8% of GDP, is big – too big – currency manipulation has nothing to do with it.

MUNICH – US President Donald Trump has criticized Germany’s enormous current-account surplus, which he considers the result of German currency manipulation. But the president is wrong. While Germany’s external surplus, at 8% of GDP, is big – too big – it is not the result of currency manipulation by Germany. The real culprits are an inflationary credit bubble in southern Europe, the expansionary policies of the European Central Bank, and the financial products US banks sold to the world. So, instead of blaming Germany, President Trump would do well to focus on institutions in his own country.

Germany’s trade surplus is rooted in the fact that Germany sells its goods too cheaply. Here, the Trump administration is basically right. The euro is too cheap relative to the US dollar, and Germany is selling too cheaply to its trading partners within the eurozone. This undervaluation boosts demand for German goods in other countries, while making Germany reluctant to import as much as it exports.

The euro is currently priced at $1.07, whereas OECD purchasing power parity stands at $1.29. This implies a 17% undervaluation of the euro. Moreover, Germany is 19% too cheap within the eurozone if one uses as a baseline a calculation by Goldman Sachs from 2013 and subtracts the appreciation in real terms since that time. On the whole, this implies that Germany’s currency is undervalued by about a third.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/WwTPsgh;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.