Euro: Too weak for Germany, too strong for others

Jamie McGeever –

In an attack on Germany, US President Donald Trump’s top trade adviser said the euro was “grossly undervalued”, a charge which may ring true for the German economy but not for the 19-member currency zone as a whole.
The adviser, Peter Navarro, said Germany, the euro zone’s economic powerhouse, was exploiting the euro exchange rate for trade purposes, a charge rejected by German Chancellor Angela Merkel.
There’s no clear method of establishing how much a currency is under or overvalued but many economists think that some economic measures show the German economy could easily cope with a stronger euro. It hit a 14-year low of $1.0339 last month.
Even German Finance Minister Wolfgang Schaeuble said on Friday the single currency could be a bit stronger for Germany.
But he agreed with economists that this would make life hard for other euro members. For weaker economies such as Greece, economic measures show the exchange rate is too strong, and for the whole currency area it is only moderately underpriced.
“The euro is below most estimates of fair value. And German exporters appear to be benefiting more than most,” said Jennifer McKeown at Capital Economics.
The White House is concerned about the exchange rate because German companies sell cars, vehicle parts, pharmaceuticals, planes and helicopters around the world, competing with American, as well as other European, manufacturers.
Exports account for nearly half Germany’s economic output, with 9.5 per cent going to the United States and around 35 per cent to euro zone countries.
In 2015, the United States became the top destination for German exports, overtaking France for the first time since 1961 due to an upturn in the US economy but also due to the weaker euro. The currency has lost more than 20 per cent of its value against the US dollar since mid 2014.
WIDE DIVERGENCE: A handful of recent reports found that while the euro was undervalued for Germany it was too strong for other countries.
The World Price Index (WPI) published by research firm World Economics each month found that the euro was undervalued on a purchasing power parity basis, a measure that takes into account what money can buy in two different currencies based on inflation and the cost of living.
A “German euro” was nearly 17 per cent undervalued against the dollar in PPP terms, while a “French euro” was overvalued by nearly 5 per cent. A “Greek euro” was overvalued by 7 per cent.
“German exporters remain the beneficiaries of a system that is causing stagnation and unemployment in the rest of Europe,” World Economics said in the report. The International Monetary Fund also said last year that the euro was undervalued by anywhere from 0 to 10 per cent for the region as a whole.
But for Germany that undervaluation was anywhere between 10 and 20 per cent, making it the most undervalued exchange rate for any of the 29 countries and jurisdictions around the world covered in the report.
One of the main goals of European monetary union in 1999 was increased economic integration and convergence between member states.
But it handed the decision-making on interest rates and currency policy to the European Central Bank, meaning that euro zone members could not longer individually use those tools to make themselves more competitive.
The latest weakness in the euro has been largely driven by the divergence between US and euro zone monetary policy, and bond yields. The US Federal Reserve is raising interest rates, while the ECB is pumping hundreds of billions of euros stimulus into the economy through quantitative easing. — Reuters