Pro-Americanism in Europe changed since Trump won the election. Those who believed that Europe would always faithfully follow America’s course have been proven wrong. The anti-Trump movement is active in many countries and in all media. Its political direction is clear. The problem with the Trump bashing is that the “liberals” criticise absolutely everything that Trump does. In proceeding like this, they lose the ability to reflect upon certain positions and policies.
I am not interested in any way in defending Donald Trump. He is a man that I have nothing in common with. Trump makes wrong decisions (his wall with Mexico, the entry of Muslims, financial markets, health care and ecology are important cases in point). He is likely to make much more wrong decisions and we hope that American society and the political institutions will be able to deal with this president before he inflicts serious damage.
But this does not mean that the direction of all Trump’s policies is wrong, even if he tackles everything in the same typical crude way. We have shown on several occasions that his position, which has been quickly dismissed as “protectionism,” is by no means absurd. There was, after all, massive criticism on Germany under the previous American administration – a criticism that found its way to the G-20. Former Finance Minister Larry Summers just repeated it one again. Summers can certainly not be suspected of harbouring any pro Trump sympathies. Unsurprisingly, nothing of this is taken serious in the German media. In the Handelsblatt, Gabor Steingart wrote that American criticism is neither left nor right, it is just “envy.” In this way, all the critics of German policy are being associated with unreason. One replaces content and analysis with emotions and personal attacks.
Mercantilism defends itself
Even when a journalist does not regress to this level, she or he has, at the least, to throw in adjectives like “absurd” or “dangerous” for good measure. This is a great time for mindless exaggeration. Now that Trump is in power, the dogs are barking louder than ever. His brutal governance creates the unique opportunity for journalists and commentators to fabricate the image of a reasonable position for themselves and for the powers they faithfully serve. German mercantilism defends itself against every attempt to call it by its proper name. The most erroneous arguments are good enough.
The „leading“ German media have been taken up the fight: Der Spiegel, the Süddeutsche Zeitung, Die Welt and the Frankfurter Allgemeine all switched to the same mode of war, the same mode they used, successfully, to defend against the attempt of the unorthodox left in 1998 to bring some reason into German and international economic policy and the capital markets. Their neo-liberal delusions know no limits or taboos. No matter what you think of Trump, the latest cover picture in Der Spiegel finds no equal in tastelessness.
The fighting has been no more outspoken than in the economic discussion. The Trade Commissioner of the Trump Government, Peter Navarro, has been the subject of the lowest debauchery imaginable. The reaction to his statement that Germany exploits the other EU countries has been particularly violent. No comment has been written that does not start by stating how wrong and nonsensical this statement is (see for example here), even if one must of course concede that the German surpluses are incredibly high.
Especially off the mark is Nikolaus Piper’s comment, who misinterprets Navarro’s statement about the “underrated implicit D-Mark” by writing that Navarro means the euro (see here). It is certainly not the euro. The issue is the real undervaluation of Germany in the eurozone. But this is the no go zone for the journalists. It is much better to quickly join the Chancellor’s argument that it is the ECB which is responsible for the adventures of the euro (see here). The undervaluation of the German position by means of wage dumping in the monetary union shall not be addressed and the German reader shall not know about it. The German media made this into a secret for their readers. They would confuse everyone if they would start talking about it now.
Inevitably, many neoliberal economists join this chorus. They howl at the anti-liberal position of the US government like a pack of hungry dogs and reaffirm their credo that the euro is not undervalued or, apart from that, that current account surpluses are completely unproblematic. This goes very far. On the page of the Tagesschau, the German television news, Holger Schmieding (Bank of America) declares that, last year, Germany followed an almost idealtypical budget policy. Any criticism is therefore completely unjustified (see here) – what the source is of these huge surpluses has been for many years is of course left unaddressed.
Savings for the US?
The position that Professor Gunther Schnabl is allowed to present on the INSM economics blog (see here) is also completely off the wall. According to Schnabl, the US has exploited Germany by using up our well deserved savings. It would have been better if we had built roads, Schnabl says, because who knows whether the US will pay us back, if ever. This makes one wonder why Germany is so proud of its own peculiar ways and does not even use the savings of others to build German roads. This would hit three birds with one stone: the German surplus would disappear and with it the criticism from all our trading partners and we would rebuild German infrastructure. The Left too proposes nonsensical policies. When Gustav Horn calls for the introduction of import duties on American products (see here), he obviously assumes that the US dollar is undervalued and that the “implicit D-Mark” is not undervalued. But, as I will show below, this is absurd.
No less questionable is the position of an American trade theorist, who says in the Economist (see here) that trade balances follow from savings and investment patterns: capital always flows first, then goods follow (Paul Steinhardt just took up this discussion again here and we have discussed Hans-Werner Sinn’s thesis in detail here). To give an example, in this view, the Chinese trade surplus was the result of the Chinese central bank buying American government bonds. One wonders why the Chinese central bank simply buys American bonds. If it would be so easy to create a trade surplus, the American central bank could simply buy German bonds and the German surplus would disappear.
What is still being fundamentally misunderstood is the simple fact that, in the case of a current account surplus, capital never flows towards deficit countries in such a manner that these countries can use these flows for their own proper development. If there are increasing domestic savings, no capital flows into the country and the demand for goods and services decreases. The lack of consumer demand can only be counterbalanced by investment that is being financed by the banking system (see here for a longer explanation of this thesis from an UNCTAD report from 2006). But such credit-financed investment stimulus is unlikely to happen because of the overall fall of demand. If the lack of domestic demand is not being addressed, the income of the national economy will fall and employment within the country will decrease.
With an increase of the current account surplus (due to improved competitiveness), the demand within and the income of the surplus country increase. It also creates new jobs, due to increasing production. In countries with a deficit, on the other hand, the demand for goods and services declines substantially and sometimes dramatically (see, for example, Greece). The income and the number of jobs in the country are falling. The fact that a deficit country receives credit from the (national and/or international) banking system, which makes it possible to buy additional foreign goods, even though its economic situation has deteriorated, does nothing to change its macroeconomic outlook. There is never any excess foreign capital that could be used for any productive activity or recovery. The rebooking that is made for the loans in the balance of payments statistics has nothing to do with capital flows.
Real exchange rates are crucial
The simple issue then – that no one wants to understand – is that the most important determinant of surpluses and deficits (the global competitive position of an economy), provides a clear indication of whether a currency will be either under- or overvalued. Overvaluation can be an absolutely reasonable justification for import duties or the like. Since the global currency system works very badly, mistakes and incorrect evaluations are being made for all possible reasons. One is speculation with currencies that creates monetary relations that have nothing to do with the fundamentals of the economies that are taking part in it. Another is dumping under the cover of a monetary union. Who could be against the fact that the deficit countries actively act against such mercantilism?
The real effective exchange rate is the comprehensive measure for assessing the position of a country. It measures both price and unit labour cost differences between countries as well as exchange rate fluctuations and it weights the countries (usually) according to their share of export. In doing so, the economy of a member of a monetary union can be relatively accurately evaluated.
Figure 1 shows the evolution of the exchange rates for the most important countries from 1980 to 1995 on the basis of inflation differences (because there are more meaningful differences in the cost of wage costs from 1995 onwards, here is an article that explains this relationship). It turns out that in the early 1980s, the US had to accept a strong real appreciation (upward movement means appreciation), it is to say a loss of competitiveness. This was corrected by massive intervention by the countries (see the Louvre Agreement) after 1985. The then existing under-evaluation of the Deutsche Mark was then also corrected. Until 1995, the positions remain unobtrusive and relatively close to one another, with the exception of Japan. In the late 1980s and mid-1990s Japan experienced a non-sensical revaluation, which paralyzed the country for a long time in many ways.
From 1995 (see Figure 2, which is based on the differences in unit labour costs), Japan was able to correct its dramatic overvaluation considerably, but the United States reverted to the same extent as Great Britain. Germany is starting its downward trend against the rest of the world and the europartners. This real depreciation is initially borne out primarily by a weak euro compared to the dollar and, above all, by the relative lagging behind of German unit labour costs compared to the European neighbours within the monetary union.
The US dollar is overvalued
Although the US dollar weakened against the euro after 2002 (and until 2011) and overall normalises the US position, the US was again heading towards appreciation after 2011. Germany also has an advantage over the US and the europartners because of its relatively weakened position – and this is quite independent of the recent weakness of the euro or the strength of the dollar. The recent value of the dollar is only marginally reflected in an appreciation. The dollar has once again strengthened at the end of 2016 and is clearly pushing towards overvaluation.
To this extent, it is clear that in the shadow of the euro (through its real depreciation against the other euro partners), Germany has gained an advantage over countries such as the USA and the UK, which have their own currency. The euro reflects the weakness of the union as a whole. A large country can hide behind the monetary system because it has no fear of having to appreciate its national currency, which would reflect its own competitiveness and nothing else.
In view of these not particularly difficult connections one wonders, of course, why even a relatively enlightened and critical mind like Paul Krugman struggles so hard with this question (see here). It is quite obvious that in universities, questions relevant to the prosperity of the nations are not even addressed. One has to ask again whether one can really criticise journalists for their lack of knowledge when economists themselves do not understand fundamental relationships.