Are Germany and the US on an economic collision course?

Desmond Lachman

 
Judging by today’s German Finance Ministry’s comments on the country’s outsized external current account surplus, the prospects for future US-German economic relations do not appear to be good. Instead of suggesting a constructive economic policy dialogue with the United States, or domestic policy measures that might bring down Germany’s external current account surplus to a more reasonable level, the German authorities are insisting that this surplus is entirely beyond their control. This seeming insensitivity to US concerns about global trade imbalances would seem to heighten the prospects that the US Treasury will name Germany as a currency manipulator when it issues its foreign exchange policies report later next month.

The German government’s case that it has little control over its external current account surplus, which now at US $300 billion or around 8 ½ percent of GDP is the largest in the world, rests on a number of questionable propositions. It is basically arguing that as a member of the Euro, Germany has ceded control over the value of its currency to the European Central Bank. It is also arguing that Germany’s strong trade performance reflects the inherent competitiveness of the German economy. At the same time, the German government is suggesting that Germany’s trade partners should exercise patience about the large surplus since over time, as Germany’s population ages, the country’s current account surplus will narrow as an aging population draws down on its savings.

The arguments for US patience being advanced by Berlin are hardly likely to pass muster in Washington. The US Treasury is bound to point out that any economy’s exchange rate is a crucial factor in determining its relative competitive position and that the German economy currently greatly benefits from having linked its currency to that of the low productivity countries of the Eurozone’s southern periphery.

In addition, the US Treasury is bound to point out that the ECB does not set interest rates in a vacuum. Rather it does so in light of the relative fiscal policy stance of its member countries. Were Germany, the largest member in the Eurozone, to loosen its fiscal policy stance, the ECB would not need to keep European interest rates so low and the Euro as weak as it presently is in order to prop up the European economy.

It would seem that the German government is making a serious mistake in underestimating the Trump Administration’s resolve to level the international trade playing field. This could prove to be a costly mistake particularly considering how vulnerable is Germany to US charges of unfair trade competition at a time that in relation to GDP its current account surplus is around three times the size of that of China. All of which makes it more than likely that Germany will soon be named as a currency manipulator by the US Treasury.