I thought we were past that

In a recent interview with the FT, Peter Navarro, an advisor to Donald Trump claimed the undervalued Euro to be an implicit Deutsche Mark and would benefit only Germany at the expense of our fellow Europeans and, of course, the US.

Hoo boy.

OK, I know that facts are not a particular strength of the new US government, but still, at least the assessment of the situation is correct: The Euro is probably undervalued vis-a-vis the Dollar, if you believe in The Economist’s Big-Mac-Index and thus in purchasing power parity. Given the more robust labour market and the recent monetary tightening of the Fed as compared to the Eurozone’s mess and still ultra-loose monetary policy by the ECB, the claim that the Euro is undervalued isn’t really a stretch.

Also true, undervalued currencies usually, ceteris paribus, benefit exporters of which Germany has a lot. But most of our exports go to Europe, i.e. the claim that Germany would benefit unfairly from the undervalued Euro is not as strong as you may think. In 2015 (oh facts again!), only 9.5% of our exports go to the US (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Aussenhandel/Tabellen/RangfolgeHandelspartner.pdf?__blob=publicationFile) How exactly our exports to other Eurozone-countries are subject to the (external!) exchange rate is beyond me.

But for the sake of the argument, let’s assume for a second that Germany is benefitting unfairly. The obvious remedy for this would be an appreciation of the Euro vis-a-vis the Dollar, and to do this the ECB should stop its ultra-loose monetary policy and start raising interest rates better sooner than later. Wait, what? Yes, this is basically what Jens Weidmann and Wolfgang Schäuble demand for quite some time now. The allegations that Germany would keep the exchange rate towards the Dollar artificially low is nonsense, at best. And even if, there are some compelling arguments of why the ECB has adopted an ultra-loose monetary policy: weak labour markets in the south, under-capitalised banks, over-indebted governments, etc. Better export opportunities for Germany are merely a side-effect. We can talk about whether the ECB’s policy is adequate or what exactly drives Germany’s exports (non-substitutability perhaps?) or whether purchasing power parity holds, but going back to mercantilist thinking of the past fits the US goverment’s economic thinking: they are not thinking at all.

Repaying Germany’s debt is a good plan, but there is a better one

Politics discuss what to do with Germany’s federal budget surplus of a bit over €6bn. Wolfgang Schäuble, the finance minister, wants to repay some of Germany’s outstanding debt, which is generally a good idea. First, Germany violates a Maastricht criterion by having debt of more than 60 per cent of its GDP and as we have seen in the European debt crisis, high public debt can at times be very dangerous.

Now, usually me as a “fiscal hawk” would agree with Mr Schäuble. But given Germany’s robust growth (1.9 per cent in the last quarter), the general improvement of the federal budget and the fact that we fall behind schedule in investment (see slide 5 of the above presentation by the finance ministry), I would rather suggest to keep the €6bn in the coffers and try to focus more investment (e.g. broadband, infrastructure and education) to bring the money where it is actually needed.