Over the weekend Schäuble, who has been a decisive figure in Eurozone politics since he became Germany’s Finance Minister in Merkel’s second coalition in 2009, opened a new front. In response to criticism of Germany’s trade surplus from the Trump administration, Schäuble announced that he agreed, that the Euro was indeed undervalued from Germany’s point of view, but that responsibility for this lay with the ECB and Mario Draghi.
Whatever your views on the Euro may be, for or against, it has to be acknowledged that this is a remarkable and revealing moment. If one is an opponent of the disintegration of the common currency, it is nothing short of horrifying.
There is no doubt that Germany’s surplus is excessive and if Germany had an independent currency backed by an independent and conservative central bank, of which the old Bundesbank was the model, its interest rates would be higher than they are right now and a Deutschmark 2.0 would thus stand higher against the dollar than the Euro does. Interest rates, NOT trade flows, are decisive for modern currency movements. Added to which German debt, known as Bunds, are one of the safe assets of choice in the world. Demand for them would drive the currency up, whatever the interest rate. A higher Deutschmark level would make German exports less competitive and imports cheaper. The result would be a smaller trade surplus, a more balanced German domestic economy. Indeed, given how attractive Bunds are, Germany might well find itself in a permanent situation of “competitive” pressure, driven more by surging imports than falling exports (Germany’s exports compete on quality as much as price). This is the chronic condition of reserve currencies, as America knows only too well.
It was precisely to avoid this scenario that German policy-makers by the late 1970s pushed for some kind of European monetary system – to avoid Germany becoming a structurally overvalued reserve currency. They didn’t fancy the obligations and “competitive” pressure that come with that position, preferring to retain Germany’s focus on manufactured exports as the main engine of growth.
Ironically, in this respect the Trumpites actually seem to have a more conventional understanding of the geoeconomics of the Euro than Schäuble. One of the defining characteristics of the Trumpites is that they are locked in the 1980s. They believe that the Euro is an invention by the Germans to pursue higher exports by stealth. But if that were the kind of tactic that Schaeuble were pursuing, he would answer his American critics by denying that Germany’s imbalance is at all relevant. He would take cover behind the Euro. And he would say that what matters from the US point of view is not its imbalance with Germany but its trade deficit with the Eurozone as a whole. This is tiny (c. $ 100 bn), especially when the size of the two economic blocs is considered. Indeed, if the germans were the stealth mercantilists that we generally take them to be, they would be asking Washington to stop counting the German trade surplus at all. The Eurozone balance is the only thing that should matter.
But a. German politicians like boasting about their trade surplus so much, they are so fixated on their “competitiveness” that submerging their champion exports in Eurozone mediocrity would be a high price to pay in political terms. Perhaps Germany’s business lobbies ought to have a word with the Finance Minister. And the rest of the world needs to keep hammering home the message that the Germans can export all they like. But they really need to think seriously about how to IMPORT MORE.
b. Schaeuble is not really replying to the Americans at all. His intended audience is inside the Eurozone. Specifically, he is using the threat posed by the Trump administration to apply further pressure on the ECB to adopt a more conservative policy. That may makes sense from the narrow point of view of German macroeconomic balance. But the ECB HAS to set policy for the entire Eurozone and unemployment across the zone has just dipped below 10 %. Youth unemployment remains disastrously high. Several members have only just exited actual deflationary conditions.
c. Schaeuble’s most fundamental agenda is to deflect pressure on to Draghi and away from the other instrument with which Germany might adjust its balance of trade, i.e. fiscal policy. The trade balance depends on imports as much as exports. Germany could raise its imports by further boosting domestic demand. Or, if it doesnt want to overheat, it could agree to Eurozone-wide government spending, financed, if necessary, by transfers. The high unemployment periphery desperately needs more demand. The econ policy bargain in the Eurozone was supposed to be that Germany did not criticize ECB bond buying, in exchange for which the rest of the Eurozone tolerated Germany’s absurd double surplus on government budget and trade account. Merkel more or less respected this line. Her reaction to the criticism from the Trump administration was appropriate and defensive. “Return to sender. Currency policy not made at this address.” Schaeuble never really has abided by the deal. His cynical exploitation of the Trumpite pressure is typical of a sustained and ruthless effort to mold the entire Eurozone in his ideal image of an austere, export-oriented economy.
d. the most positive gloss one can put on the entire episode is that Schaeuble is playing bad cop to Merkel’s good cop. Crucially the CDU has to worry about vote gains by the AfD in the upcoming general election. Schaeuble has in the past blamed the rise of the AfD to 50 % not on the refugees but on Draghi and his irresponsible, “Latin” or “American-style” monetary policy (my words not his). Now he is closing the circle by echoing the criticism of America’s own alt-right within the Eurozone. If this is necessary to contain a big AfD surge, it may pay dividends. But if this is the case, one can only hope that Draghi and co are in the picture. Is it likely. In any case, the coincidence of the Trump challenge with the German election in September 2017 is a further disastrous conjuncture to reckon with.
Upshot is that key German player is not resisting the massive pressure from Washington and is not reinforcing Eurozone unity. Instead, he is turning it inside the Eurozone. His aim is to reinforce his agenda of ultra-austerity. If he succeeds, it will be prematurely abort the Eurozone’s very gradual recovery from the disaster of 2010-2014. That in turn will exacerbate the social crisis which contributes to anti-EU feeling across the bloc.
https://www.ft.com/content/d2384ec6-eb89-11e6-930f-061b01e23655
https://www.ft.com/content/81aebca0-e941-11e6-893c-082c54a7f539
https://www.ft.com/content/5602460e-e869-11e6-893c-082c54a7f539
