Friday, September 27, 2013

Germany As Currency Manipulator

Paul Krugman today wrote about Germany as a currency manipulator.

"The general point is that if we imagine a euro breakup, I think everyone would agree that the new mark would soar in value, making German manufacturing much less competitive.
Well, I guess I am not everyone. A euro break up would wipe out most of the banking sector in Germany, so no I don't think that the new mark would soar at all. But the general point that Krugman seems to be making is that the euro is weak, much weaker than the mark would have been if the euro had never happened. But, I also disagree on that point.

  • Compared to the yen, the euro is today 33 percent stronger than it was one year ago.
  • Dollar 5 percent stronger
  • Pound sterling 5.8 percent stronger
  • Rouble 9.6 percent stronger
The euro is now relatively strong compared to other currencies. The German trade balance is below what it was in 2008. Non domestic new orders have been pretty much unchanged for two years now.

Add in inflation and the German trade surplus is actually becoming smaller. I think the picture we are seeing is that the euro is pretty close to the level that the Deutsche mark would be. Is this good or even acceptable? Hell no! This is an absolute disaster for all other eurozone countries. Germany needs higher inflation, much higher inflation. It is a pretty strange situation in Germany wages need to be higher and at the same time the ECB should try to weaken the euro to get all other countries more competitive.. But, the German media starts crying Weimar if we even get close to two percent. 

One more thing. Krugman shows a graphic of Target2 to support his point. But the German Target2 net position has been falling, without affecting the trade balance at all, since the announcement of the ECB OMT program in 2012.

So, yes Germany is a currency manipulator. It is keeping the euro stronger than it should be. Either Germany starts accepting high inflation, or it should leave the euro.

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