When will Trump accuse Denmark of being a ‘currency manipulator’?
This is from the Financial Times today:
“Germany is using a “grossly undervalued” euro to exploit the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy. Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main partners. His views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties. In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”I must say that I find Navarro’s comments completely ludicrous and uninformed and I have little respect for this mercantilist “analysis”. Adam Smith taught us back in 1776 that we should not judge the Wealth of Nations on the size of its trade surplus. Apparently Navarro never read the The Wealth of Nations or understood the insights of David Ricardo about comparative advantages. Trade is not a zero sum game. Trade is a positive sum game, where both sides of the trade gains – otherwise the trade would never happen. Free trade makes us all more prosperous. Furthermore, having an undervalued currency does not take anything away from other nations. In fact, an undervalued currency means that you are selling you goods to other nations at a too low price, which means that you effectively are subsidizing the consumers of other nations. Hence, the if German cars are 20% “too cheap” because the “German euro” is undervalued then it means that Americans can save 20% on cars by importing them from Germany, which effectively is increasing their purchasing power. This increase in their purchasing power makes it possible for American consumers to buy more of other goods for example US produced Big Macs or books from Amazon. But Peter Navarro obvious does not understand this. In addition to that it is rather bizarre to talk about Germany as being a “currency manipulator” as Germany does not have its own currency – as Germany is a member of the euro currency area. To talk about Germany as a currency manipulator is as meaningful as to talk about Texas as a currency manipulator. Furthermore, the euro is a freely floating currency exactly as the US dollar and the inflation target of the European Central Bank is 2% - exactly the same as is the case for Federal Reserve. So if Germany is a currency manipulator then the US is as well. And finally, the German Bundesbank and key German policy makers have been extremely critical about the ECB's efforts to ease monetary policy over the past two years so if anything the Germans have been pushing for a stronger euro! Peter Navarro could rightly criticize the Germans for that but that would of course go completely counter to his "arguments". But of course this is not the “analysis” Peter Navarro is doing. He is instead (wrongly!) focusing on the trade and current account surplus and he is observing that Germany has a large current account surplus and the US has a current account deficit and therefore Navarro wrongly concludes that Germany is stealing jobs from the US. Denmark – Navarro next target? Navarro’s deeply flawed analysis makes me nervous as the direct consequence of it is that the US through the use of aggressive trade policies should force all nations, which are running sizable account surpluses to “revalue” there currencies. This effective means that the US would forces nations around the world to tighten monetary policy. The consequence of this could be devastating. Just imagine that the Trump was able to threaten the ECB to “engineer” for example a 20% appreciation of the euro. This would effectively be a massively deflationary shock to the euro zone economy, which would without a doubt cause the euro crisis to flare up again with the real risk of causing euro area to disintegrate. This in itself would have extremely negative consequences for the global financial system and the global economy. I am no fan of the euro as an idea, but I certainly do not want to see it blow up as a consequence of ‘madman policies’. Closer to home I have another concern. Hence, if Navarro claims that Germany is a “currency manipulator” based on the size of the Germany current account surplus what would he say about my native Denmark? The graph below shows the Danish and the Germany currency account surplus. As the graph shows the Danish current account surplus is very large – close to 7% of GDP – and only slightly smaller than the German current account surplus. The Danish current account surplus against the US alone is around 3% of GDP. And contrary to Germany Denmark is not a member of the euro area. Rather the Danish krone is pegged to the euro and in principle Denmark could either float the krone or revalue against the euro. Both scenarios seem unlikely for now and the Danish government and central bank is strongly committed to the present monetary arrangement, but a real fear – given Navarro’s attack on Germany – could be that the Trump administration will accuse other Europe nations – within and outside of the euro area including Denmark of “currency manipulation”. And it seems only a matter of time before the Trump administration will start to talk about the need to a Plaza Accord version 2. That would certainly be bad news for the world and could force unwarranted tightening of monetary conditions on nations around the world – including my native Denmark. PS Peter Navarro today again demonstrated that he is utterly clueless about what VAT is. Apparently he thinks VAT is some kind of import tax. However, VAT is applied equally to imported and domestically produced goods in all countries like Denmark and Germany, which have a VAT.