Does Germany benefit, at US expense, from a deliberately undervalued “implicit Deutsche Mark”?

“Goodbye my friend
I know you’re gone, you said you’re gone
But I can still feel you here
It’s not the end
Gotta keep it strong
Before the pain turns into fear
So glad we made it
Time will never change it, no no no
No no no no”

Those are lyrics from the Spice Girls’ “Goodbye”, Number 1 in the charts at the end of 1998 as the Germans bid Abschied to their beloved Deutsche Mark and Hallo to the euro.

That year, 1998, Nokia was the world top-selling mobile phone manufacturer, churning out 37.4 million of them, with the markets new entrant, Samsung, managing a measly 6 million and Apple nowhere. In 2015, Samsung sold 320 million mobile phones, Apple 226 million and Nokia not in the top 5. No-one had heard of Osama bin Laden. The tech boom had barely begun. Boris Yeltsin was in charge in Russia. And Gerhard Schröder had just taken over from Helmut Kohl as German Chancellor.

Young people eligible to vote in the French and German elections this year were not even born. Anyone suggesting bailing out a bank would be laughed at. Most Britons expected the UK to join the euro. Front National had one seat in the French assembly.

It was a long time ago that anyone last used a Deutsche Mark. Yet Donald Trump’s top trade advisor, Peter Navarro, says that there is an “implicit Deutsche Mark” that gives Germany an unfair advantage over its main trading partners, making Germany one of the main barriers to a US-EU trade deal. “A big obstacle to viewing TTIP [the US-EU trade deal that didn’t quite make it] as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an implicit Deutsche Mark that is grossly undervalued.”

A lot of analysis of the Eurozone crisis used to repeat this idea. Folk claimed that Germany gained out of having an implicitly under-valued currency within the euro, and that that justified Germany paying bailouts for euro members that had lost out.

Even if one bought the rather bizarre notion that, eighteen years since the Deutsche Mark was last used, there is still an “implicit Deutsche Mark” rather than everyone in the Eurozone thinking in terms of euros, the idea that Germany would gain from having a systematically under-valued currency would still be weird.

If my currency goes down in value, my citizens initially get poorer. That is what has happened in the UK since August 2015, when Sterling reached its peak and then fell 12% to its pre-referendum low in April 2016 and a further 7% since then. UK citizens holding pounds can buy less imports and buy less foreign assets. But at the same time as making UK citizens poorer, the depreciation of Sterling also makes UK assets and workers cheaper. So foreigners invest more here, bidding up the prices of UK stocks and real estate, and foreigners buy more of our stuff, enabling our firms to hire more workers and pay those workers more. The economy adjusts to a depreciation by the sterling price of assets rising and by sterling GDP growing faster, until its citizens stop being poorer and its assets and wages stop being cheap.

In a flexible economy, the exchange rate can’t stay under-valued. Either the exchange rate will strengthen or, if it doesn’t prices and output in the internal economy will adjust.

Thus, we could certainly blame or credit the introduction of the euro with all kinds of structural adjustment in the German economy since the late 1990s. If the euro has resulted in the German international exchange rate being cheaper than it would otherwise have been, that means German citizens have ended up poorer but the German currency price of assets and wages may have risen faster. That isn’t obviously beneficial to Germany. It’s a disruption, compared with what might have been optimal for Germany had it had its own currency. In itself, that’s almost unambiguously bad for Germany, virtually by definition. That does not mean that the euro has been bad, overall, for Germany, because the euro creates a number of other benefits that are independent of the way it disrupts the German economy from what would otherwise have been its optimal path. (And no, I’m not saying that those benefits do, in practice outweigh the losses, either. That’s a topic for another article…)

The German economy did its best, relative to other economies, in the 1970s and 1980s when the German currency was strong, keeping inflation low when others suffered from it, creating pressure on German firms to boost productivity to compete and enriching German asset-holders, encouraging prudent saving and investment. Old-fashioned UK theorists who reached for devaluation after devaluation from the 1940s to the 1990s, almost always to the UK’s detriment, may well look enviously at a period of supposed German currency undervaluation and think it desirable. Germans do not.

The notion that Germany, famous for the virtues associated with a strong currency, would desire a weak one is only bested in its eccentricity by the idea that a currency last used when the Spice Girls were Number 1 still “implicitly exists”. If all Trump’s team’s economics is as off the mark as this, they could easily see demons and currency manipulators everywhere, and international economic relations could get pretty ugly pretty fast.