Germany the currency manipulator?

Today gives us an opportunity to look again at the German economy. As we do so we see yet another situation where conventional analysis and media reporting is flawed. So often we read that Germany has in some way been defeated in its efforts to direct the policies of the ECB ( European Central Bank). The evidence for that are the regular bursts of rhetoric from the German Bundesbank against the policies of negative interest-rates and a balance sheet of the order of 4.5 trillion Euros. However this to my mind ignores a much larger victory Germany gained when it joined the Euro because it has achieved for itself a much lower and therefore more competitive exchange rate. It did so in a way which has avoided the barrage of “currency manipulator” allegations that have been fired at others because it was a type of stealth effort.

Also the impact of this move has been heightened by the credit crunch era. We find evidence for this if we look at Switzerland and the Swiss Franc which of the currencies we have is the most similar. How is it doing? Well let me hand you over to the Swiss National Bank. From Reuters yesterday.

The Swiss National Bank’s (SNB) policy of negative interest rates is not ideal but is nevertheless necessary in order to weaken Switzerland’s “significantly overvalued” currency, Chairman Thomas Jordan said on Thursday…………Jordan said negative interest rates, along with the central bank’s willingness to intervene in the currency were absolutely necessary in order to protect exporters from a stronger Swiss franc, which is a safe-haven currency in times of market stress.

So if the Swiss Franc is a safe haven currency what would a German Deutschmark be if it existed? I think we can be sure that its value would have soared in recent times which leads me back to the competitive advantage point. There is also an irony as we note that on Switzerland’s road Germany would have had negative interest-rates anyway and maybe more negative than now. Ouch! We find ourselves in some strange places these days. Also would it now be a hedge fund manager as it tried to find somewhere to put its currency reserves? This week raised a wry smile as Apple passed the US $150 mark as I thought that the Swiss National Bank would be one of those most pleased via its holdings. I guess if you have 695.9 billion Swiss Francs they burn a hole in your pocket or something like that.

The trade surplus

The opening paragraph of Tuesday’s trade figures hammer home a consequence of this.

Germany exported goods to the value of 118.2 billion euros and imported goods to the value of 92.9 billion euros in March 2017. These are the highest monthly figures ever reported for both exports and imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 10.8% and imports by 14.7% in March 2017 year on year.

So if you are looking for evidence of a lower currency leading to trade advantages it is hard to miss the persistent surpluses of Germany.

The foreign trade balance showed a surplus of 25.4 billion euros in March 2017. In March 2016, the surplus amounted to 25.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.6 billion euros in March 2017.

Indeed the statistics agency has an in focus highlight which rams this home.

According to Eurostat data, Germany had the highest export surplus among EU countries (257 billion euros) in 2016, as was the case in the previous years. Germany exported goods totalling 1,210 billion euros while the value of imports was 953 billion euros. Compared with the previous year, the export surplus rose by roughly 3% – in 2015, it had been 248 billion euros.

Interestingly we see that the idea of the Euro area having a large trade  surplus is true but that the vast majority of it is Germany as it was 257 billion out of 272 billion Euros in 2016.

Bond yields

The other gain for Germany from a combination of ECB policy and the credit crunch era is the extraordinary low level of interest it has to pay to issue new debt. Indeed this has frequently been negative in recent times meaning that Germany has been paid to issue its debt.  Some of that is still true as for example the yield on its five-year benchmark bond is -0.31% as I type this.

Even if it were to borrow for ten years then Germany would only have to pay 0.41% which I cannot say often enough is extraordinarily low. So it has clearly benefited from the 368 billion Euros of purchases of German debt by the ECB as we mull if there was a country which needed them less?

The catch is that it is mostly the German government that has benefited as it looks to run a fiscal surplus. As to the ordinary German well as I pointed out earlier this week first-time buyers will be much less keen as the easy monetary policy of recent years has led to something of a house price boom in Germany.

GDP and economic output

This morning’s official GDP data had a familiar drumbeat to it.

In addition, the development of foreign trade was more dynamic and contributed to growth as exports increased more than imports, according to provisional results.

The quarterly number was good and this impression was reinforced by the breakdown of the numbers.

. In the first quarter of 2017, the gross domestic product (GDP) rose 0.6% on the fourth quarter of 2016 after adjustment for price, seasonal and calendar variations……. Capital formation increased substantially. Due to the mild weather, fixed capital formation especially in construction, but also in machinery and equipment was markedly up compared with the fourth quarter of 2016.

Is the weather allowed to be a positive influence? Only in Germany perhaps as elsewhere its role invariably is to take the blame. There is an undercut to this though as we mull the individual experience and note that economic growth over the past year was 1.7%.

The economic performance in the first quarter of 2017 was achieved by 43.7 million persons in employment, which was an increase of 638,000 or 1.5% on a year earlier.

So whilst the employment rise is welcome we see that it very nearly matches the level of economic growth. Also if we look back to the data we are left wondering if the construction investment boom is related to the house price boom and the UK economic model is being copied to some extent.


The economic outlook remains bright for Germany if the Markit business or PMI surveys are any guide.

IHS Markit expects German economic growth to strengthen to 0.7% qr/qr in the first quarter, and the April PMI provides an early signal that expansion will remain strong in the second quarter.

So something along the lines of more of the same is expected although of course that was only one month of this quarter. If we look at the overall situation let us use a type of Good Germany: Bad Germany type of analysis that mimics Italy.

The good sees that the reforms of the past have enabled Germany to expand its economy post credit crunch such that GDP  reached 110. 02 last year compared to 101.66 in 2008. It has a substantial trade surplus and these days has an internationally rare fiscal surplus.

The trouble is that some of the latter points are also part of Bad Germany as we see how its adoption of the Euro has helped feed its trade surplus via a more competitive exchange rate. Also there is the issue that one of the problems pre credit crunch was world imbalances and the German trade surplus was one of them. Within the Euro area some will wonder if it would be helped by less fiscal austerity. Then we get to the issue of comparing the rise in employment with GDP growth, is Germany like the rest of us struggling for productivity growth with its implications for wages? Also as I pointed out earlier this week the rise in house prices will make first-time buyers wonder if they are indeed better off?


25 thoughts on “Germany the currency manipulator?

  1. Without getting into politics, I can remember a long debate about countries joining the Euro or, in our case, the ERM. Much of that debate focused on so-called “convergence criteria” which meant (from memory) similar rates of inflation, deficits etc.
    It seems as though convergence was a temporary phenomenon and that the Euro has caused a sharp deterioration in the terms of trade over time without the normal stabiliser, currency movement, able to take the strain.
    Germany’s trade and fiscal performance are miles apart from the rest of the Eurozone as a result.

    • Hi James

      The financial markets were thrown what would be called a huge head fake in basketball. What I mean by this was that bond yields did converge in the Euro area and I recall organisations trading this and making big profits. This became something of a self fulfilling prophecy as more piled in. The catch of course emerged in Spain and Ireland in the housing market and then in Greece pretty much everywhere. Oh and Italy and Portugal say very little economic growth. ..

  2. hello Shaun,

    No need for Germany to manipulate the Euro. Its ideal for exports as you pint out.

    All down sides can be corrected by full fiscal union, however I don’t think thats on the cards.

    As for the workers I wonder how long it is before they get hacked off at the site of so much money being made and how little gets to them, along with inflation taking off .

    The bigger question is – why ? why are all Western economies all going down the same path ?

    pumping up debt ?

    whats the end game , Shaun?

    one man /woman owns 99% of the world’s wealth and no way to to re-distribute it back?

    Who will be the Emperor of all Mankind?


    PS: yesterday you posed the question of who owns/runs Britain , I believe its about 6000-10,000 persons cant find the link for it at the mo.

    • There was a treaty against cross border bailout. However when their banker chums were worried about loses on Greek Govt bonds – the rules got broken. And nobody has been held accountable. Worse still – Juncker and cohorts have immunity. Immunity and democracy don’t mix – just like oil and water.

      The outcome is unpredictable, but historically, western middle classes did well under democracy when voters punished politicians who allowed the 1% to avoid taxes.

      • Am I right in thinking that you are suggesting that the EU
        1. Acted against the interests of its people to help bankers?
        2. Didn’t hold people accountable?
        I am shocked, yes shocked, by your cynicism.

  3. Hi Shaun

    One thing I don’t think you mentioned is that I believe the trade surplus is illegal under the terms of the ESM(?). The ESM provides for sanctions in the case of violations. let alone egregious violations as is the case with Germany, but these sanctions have never been invoked; I wonder why?

    This permanent structural exchange rate advantage enjoyed by Germany merely highlights the fundamental dysfunction of the Euro as it is currently set up; it will merely increase the distance between Germany and the rest, in which case how can you have the much vaunted “ever closer union” under conditions of ever widening wealth with no means to correct this within the EZ; it is complete and utter nonsense? It is quite ironical that one of the main objectives of the EU is that ever closer union but the existence of the Euro in its current form is actually working against that by widening divisions within the bloc and making it much much harder to achieve.

    I believe the EU will disintegrate and the Euro will be the proximate cause of that disintegration. Of course if you had a full fiscal union, debt pooling et al it would be different but that implies political union and that will not happen; the Germans themselves would not have it; they are, at the end of the day, much too sensible.

    • Good comment. I think that the founders of the Euro either:
      1. Did not spot this; or
      2. Knew about it, but assumed that the union would be so close when people noticed that it would be too late to stop full blown fiscal union.
      I think that what has happened is that the Euro project
      1. Has been launched
      2. Has caused the problems that you mention
      3. But the elite failed to get the plebs in line in time
      4. It is now too late to get fiscal union
      Trapped, in fact, as you say.

    • Firstly, the euro was forced on Germany by French politicians in exchange for allowing re-unification. Kohl didn’t want it. Be careful what you wish for.

      Secondly, Germans never were allowed a referendum on the euro – they loved their hard DMark. It is only the 1% of business owners who gain from the euro.

      The whole EU & EC is unaccountable and disfunctional. Just compare outcomes for the 99% in Switzerland and/or Iceland which had a referendum on whether to rescue banks ….

      real democracy is only possible with rule by plebiscte and accountability.

  4. Expat is right – there was a lot of resistance to the euro in Germany and most would happily have stayed with the D-Mark whatever its value. It was of course also the French, who pushed for Greece to be in the euro.

    Where this argument breaks down should be obvious to anyone, who watches the current reruns of Auf Wiedersehen Pet on Yesterday- the UKP was worth DM4 then (1983) and now it would be about DM2.40. Are we better off?

    There is almost a habit in the UK and elsewhere of blaming Germany for being successful, when the reality is that since England won the World Cup in 1966, (West) Germany has won it 3 times. We don’t buy BMWs/VWs or Bosch white goods because they are cheap, but because they are worth the extra – if you just want a cheap car, buy a Dacia or Kia or some unreliable French heap. The world may wish to speak English, but that is down to the Yanks these days – but Indian engineers learn German, because that is where much of the technical literature can be found. We kid ourselves that we can have a housing bubble and export it to Germany (it is just the low rate policy) when (and I have argued this since 1978) Germany invested in skills and training to produce quality.

    It has finished up in a referendum, where the idle Brits seemed to relish in moaning about successful Germany – and voted themselves a 15% devaluation, which (in a fake way) boosted the economy for all of 6 months.To keep to our musical theme, compare the optimism of this recent German tune with a soon-to-be-repeated British tune from 2002 about 1981

  5. Hi Shaun, Did Germany ever give THAT much thought to the future trajectory of the euro and euro member countries? Did it correctly anticipate the arrival of weaker economy countries in 2001 and 2007 – 2015 which would benefit more productive countries?

    Then, having made all those guesses did it consciously think that the other countries would not try to become more productive thereby conferring an ongoing advantage to Germany?

    I do not believe they ever thought that far ahead or that deeply. If they did they were very very silly in making all those assumptions.

    I think there is no conspiracy here because as Expat says they were strong armed into the Euro in the first place. They simply got on with working hard and doing their best to try to make great products that the world wanted. Through hard work they created more value which went even further their way as they happened to be in a currency union where the other members are not so interested in improving their productivity and quality.

    We should all learn from Germany’s work ethic and commitment to quality products..

    • Hi Noo2

      I agree that Germany does deserve credit for producing quality products and pointed out in the post that it reformed its economy. But it has turned out that chosing the Euro has in the credit crunch era in particular given it quite an advantage compared to if it had stayed with the DM. My point was not that it had great foresight back in the day but that the commonly expressed view that it has somehow “lost” because of ECB policy is inaccurate.

  6. “Germany” that takes advantage of the Euro is the 1% or perhaps 5% richest Germans. The others habe low income, can’t buy real estate and will eventually pay the bills in the European transfer union…

  7. Nick Ridley foresaw this problem back in 1990,,,,,and was sacked for his pains. Undoubtedly the best Chancellor we never had.

  8. I don’t get it, what the hell is the point of these German surpluses? You’d think surely having reached this holy grail that Germany would have Full Employment wouldn’t you? It doesn’t. You’d think that Germany would have fantastic wages for it’s people, it doesn’t. You’d think Germany would have world beating infrastructure it doesn’t, the place is falling apart.

    Germany is to the EU as London is to the UK. Both are sucking too much out of the whole and this is not sustainable.

    • Surpluses are real because they represent success in selling what you produce – full employment is a mirage, because as Friedman said, you can put the unemployed to work digging holes and filling them in.

      • Ummmm, that was Keynes. Fraudman, sorry Friedman, made Full Employment a mirage by sleight of hand because he wanted to abandon it. All our current problems are caused by act of treachery.

    • That is an excellent point!
      I guess that it means that:
      1. You can boss everyone else around (see Greece/Portugal etc);
      2. Your politicians can give your money away to prop up countries savaged by the Euro (but only by mechanisms such as the ECB so that we plebs don’t complain too much)
      3. You get to take over the EU – does anyone see France any longer as an equal partner??

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