By Konstantin Veit, Washington, DC
Earlier this week Peter Navarro, Donald Trump’s top trade adviser and head of the new National Trade Council in an email interview with the Financial Times, accused Germany of using a “grossly undervalued” euro to “exploit” its EU and U.S. trading partners. Furthermore, Navarro told the FT that Germany was a main obstacle to a future Transatlantic Trade and Investment Partnership, the potentially transformative U.S.-EU trade agreement being negotiated by the Obama administration and which is now off the table.
Navarro’s interview temporarily spiked the euro almost to $1.08, but did not throw German chancellor Merkel off balance, who promptly reacted to Navarro’s accusations-- stating that Germany cannot influence the euro exchange rate and has always “supported an independent European Central Bank.” New German minister of economics Brigitte Zypries is more pungent, saying that Trump’s policy decisions were going in “a totally wrong direction.” She warned that American protectionism would cost growth and jobs in both economies. Henrik Enderlein, director at Jacques Delors Institut in Berlin said Navarro “hasn’t understood the euro or this is a serious conspiracy accusation.” Jeroen Dijsselbloem, president of the Eurogroup of finance ministers, told the FT that “clearly Navarro has no clue about the eurozone.”
Navarro’s comments are not the first from the Trump administration accusing important U.S. trade partners of currency manipulation – Navarro and Trump himself repeatedly reproached Japan and especially China for a cheating currency and trade policy – nor is it a new insight that the euro remains weak. The undervalued currency poses a challenge to Southern European countries’ growth, whereas Germany substantially benefits from the weak euro, since the country has a very strong export sector. Germany’s exports account for some 45 percent of its gross domestic product. Washington, Brussels and several southern European countries have suggested that Germany should stimulate its domestic demand to rebalance its large trade surplus, which would appreciate the euro, make German exports more expensive and enhance the competitiveness of the southern euro states.
However, what is striking is the tone that Mr. Navarro uses to express his opinion. Diplomatic language is clearly no longer of currency in the Trump White House. Navarro baldly states that Germany deliberately manipulates the common currency to exploit its largest trading partners, which are at the same time its most important allies. Navarro’s attack follows Trump calling NATO obsolete, the EU a vehicle for German interests and criticizing Angela Merkel for her immigration policy.
Beside the diplomatic strain, the contentions are misplaced. While the U.S. Fed started to hike interest rates cautiously since late 2015, the ECB still conducts large assets purchase programs, holding the euro weak while the dollar regains strength. Some of the loudest critiques of the ECB’s monetary policy comes from Germany, namely from the Bundesbank and several lawmakers. As the Financial Times observed, “the view Berlin is intentionally advocating a weak euro to its own economic benefit is not widely shared.”
The Trump administration clearly prefers bilateral trade deals over multilateral agreements. It has withdrawn the United States from the Trans-Pacific Partnership, a major and hard-won free trade agreement with 11 Pacific Rim nations, and criticized the World Trade Organization, arguing that its’ rules represent an “unfair subsidy to foreigners exporting to the U.S.,” as Navarro told the Financial Times. He wants to unwind and repatriate international supply chains and develop a “robust domestic supply chain,” and practice a protectionist trade policy that “will spur job and wage growth.”
The Navarro broadside certainly underlines the new U.S. administration’s “growing willingness … to antagonize EU leaders and particularly the German chancellor,” and raises tensions in the European-American alliance, which has been the bedrock of the post-World War II international order. Yet, it’s important for Germany, its European allies and the EU not to overreact to these early salvos, in hopes that the importance of a mutually beneficial transatlantic relationship will ultimately become apparent as the new U.S. administration gains experience and staff.
Konstantin Veit is an Editorial Assistant at the European Institute.