In surprising comments that may rekindle a verbal currency war between president Trump and Europe, German finance minister Wolfgang Schäuble told German newspaper Tagesspiegel that in his opinion the Euro is "too low" for Germany, echoing criticism from Trump's trade advisor Peter Navarro, who last week told the FT that Germany was exploiting its US and EU partners by using a “grossly undervalued” euro to create a vast trade surplus. The comment placed Germany, alongside China and Japan, in a category of countries that the Trump administration has accused of currency manipulation for competitive advantage.
As the FT reports on Sunday morning, Schauble acknowledged that the ECB had to set monetary policy for the eurozone as a whole, but said: “It is too loose for Germany.” A recent chart from Morgan Stanley confirms that on a PPP basis, the EUR is over 40% undervalued for exporting and current surplus powerhouse Germany on a standalone basis, however for many of Europe's peripheral countries it still remains expensive.
What was more curious about Schauble statement is that the German finance minister blamed the European Central Bank for the low exchange rate.
“The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticised for the consequences of this policy.”
However, as events last week showed, an otherwise hawkish Germany being criticized for ECB's monetary policy is preicsely what happened.
Schäuble pointed out that Germany was not able to set exchange rate policy and pinned responsibility for the euro’s weakness against the dollar on the ECB. The German finance ministry was “not an ardent fan” of the ECB’s policy of quantitative easing that had helped to weaken the single currency.
In other words, if Trump wants to blame anyone for the weak Euro - according to the German - he should direct his anger at Mario Draghi.
As the FT notes, Germany's Ifo Institute recorded a trade surplus of nearly $300bn last year, outpacing China by more than $50bn to hold the world’s largest trade surplus. Critics not only in Washington, but also Brussels have called for Germany to reframe its fiscal policy and stimulate domestic demand to increase imports. So far, however, any European criticism of Germany has been mostly lip service, which is why the arrival of Trump as a vocal critic of German trade policy has sparked renewed concern in Germany.
Additionally, in the interview Schäuble questioned why a US president would want to divide Europe given that the continent “is closer to them than anybody else in the world”. He added he did not believe that Mr Trump was seriously trying to split up Europe, but he was “testing” a lot.
Despite implicitly agreeing with Trump that the ECB is at fault for keeping the Euro too low, Schauble scorned U.S. accusations that Europe’s biggest economy is using an undervalued currency as a tool to gain unfair trade advantages, saying aides to President Donald Trump apparently don’t understand that the euro’s exchange rate isn’t set by the government.
“In America, the savvy advisers to the new president are now concerned with the question of why the German economy is to a certain extent competitive and performing well,” Schaeuble said on Friday in Saarbruecken, cited by Bloomberg. “They have not entirely understood, or at least not everyone, that the German federal government isn’t responsible for monetary policy in Europe, but someone else.”
As per his latest clarification on Sunday, that "responsible someone" is Mario Draghi.
Schauble added that “the problem is that we have a structure in the monetary union, a common currency without a common finance and economic policy, and that member states - the ECB isn’t tiring of saying that - aren’t doing what they committed to,” Schaeuble said. “One of the big problems of monetary policy” is how to begin an exit from the “unusual” stance without “risking bigger economic upheavals in other European countries,” Schaeuble said.
Schäuble’s Sunday comments on monetary policy comprise his latest attack on the ECB’s easy money policies. Last year, the hawkish finance minister blamed Draghi for “50 per cent” of the success of the populist rightwing Alternative for Germany party. Schäuble and others on the conservative wing of Chancellor Angela Merkel’s ruling CDU/CSU bloc are concerned that as well as profiting from the refugee crisis, the Eurosceptic AfD, which wants an end to the common currency bloc in its present form, is winning support from voters worried about the euro’s stability and the low interest on their savings.
Draghi, meanwhile, was on Friday hailing efforts at European unification, defending the common currency and applauding some of Germany’s labour reform policies in a speech given in Ljubljana, Slovenia.
“There are some today who believe that Europe would be better off if we did not have the single currency and could devalue our exchange rates instead,” Mr Draghi said. “But, as we have seen, countries that have implemented reforms do not depend on a flexible exchange rate to achieve sustainable growth. And for those that have not reformed, one has to ask how beneficial a flexible exchange rate would really be. After all, if a country has low productivity growth because of deep-rooted structural problems, the exchange rate cannot be the answer.”
While it remains to be seen if Trump will pivot his attacks away from Germany and to the rightful source of Europe's weak currency, the European Central Bank which continues to monetize a record amount of debt instruments, now owns over 10% of Europe's entire stock of corporate debt, and whose balance sheet has ballooned to over 36% of the Eurozone's GDP...
... it would certainly make for a welcome change for Trump to launch an occasional twitter attack at the ECB, instead of focusing all his social media energy on the US Judicial System, although with his cabinet being comprised of numerous former coworkers of Mario Draghi, who would rather keep the ECB's role in facilitating Germany's surplus under wraps, it does not appear too likely.