The Balance of Recovery

President Trump’s administration has made many criticisms of Germany. One of the more important was by his top trade advisor, Peter Nabarro. He accused the Germans of using a “grossly undervalued” Euro to “exploit” its trading relationship with America. The complaint that when the Euro was formed the Deutschmark was too low relative to the other European currencies is a longstanding one within Europe itself.

The Trump administration has raised the stakes. The Euro was described as an “implicit Deutschmark”, whose value is manipulated to be artificially low. This gives Germany, and the rest of the Euro zone, an unfair advantage both in direct trade with the US and in other export markets such as China.

Certainly, the Germans have run a large trade surplus for years. But this was not always the case. Between 1991, when Germany was re-unified and 1998, their average annual balance of payments deficit was around $20 billion, according to OECD data.

The Euro came into existence on 1 January 1999. Germany took a bit of time to adjust, with their deficit in 1999 and 2000 being just over $30 billion. This fell sharply to $7 billion in 2001. Germany has subsequently run a surplus in every single year. Indeed, since 2010, their average annual balance of payments surplus has been a massive $250 billion.

So the timing of the switch from deficit to surplus lends plausibility to the accusations of the US government.

The balance of payments is calculated in current price terms, reflecting the values of both imports and exports. These in turn are influenced by a wide range of factors, including both domestic costs and exchange rate changes. Another perspective is to strip these out, and look at changes in the volumes of exports and imports rather than their values. The difference between the volumes makes up part of the calculation of GDP, the total output of an economy.

The recession caused by the financial crisis had bottomed out in many economies by the middle of 2009. Output stopped falling, and began a tentative rise.

Since then, the pattern of recovery in terms of the component parts of GDP has been quite different in the Euro zone to both the US and the UK. The increase in the net trade balance in volume terms has been by far the biggest single contributor to the rise in output in the Euro zone as a whole. Just over 40 per cent of the total increase in GDP is accounted for by exports rising faster than imports.

GDP has grown by a lot more in the US and the UK, up 17 and 16 per cent respectively since mid-2009 than the 8 per cent increase in the Euro zone. But in both the Anglo Saxon countries, imports have risen more than exports. Their recoveries have been driven by the domestic private sector, by personal consumption and by strong increases in investment by companies.

From both these perspectives, there is substance in the attacks which Trump has made on Germany and the Euro zone.