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Trump’s beef with Berlin – Why accusations of euro exploitation are simply ‘nonsense’

ODD ANDERSEN,JOSHUA LOTT | AFP | Getty Images

While allegations made on Tuesday by President Donald Trump's top trade aide that the euro is "grossly undervalued" may have some legs, blaming Germany for intentionally suppressing the currency is wide of the mark, economists and analysts have told CNBC.

"It's nonsense. The Bundesbank (German central bank) wants a tighter European Central Bank (ECB) policy, which would mean a stronger euro. Germans are usually in favor of hard currency," Holger Schmieding, chief economist at Berenberg, told CNBC via email on Wednesday.

Indeed, the remarks will come as a surprise in Germany given that the recent weakness of the euro versus the dollar is mainly the effect of ECB quantitative easing (QE) policies, with which most policymakers and members of the German public disagree, according to Pepijn Bergsen of the Economist Intelligence Unit (EIU).

"As such, they do not see it as a willful attempt at currency manipulation, a policy that, given the Bundesbank's aversion to inflation, they would be very unlikely to attempt as it runs the risk of higher inflation," Bergsen, the EIU's lead Germany analyst explained.

"This view will have been strengthened by the latest inflation data, which shows it is picking up at a pace that is likely to be slightly too strong for comfort for most Germans," he added.

Memories of hyperinflation

Peter Navarro, senior economic advisor to 2016 Republican Presidential Nominee Donald Trump last September.
Andrew Harrer | Bloomberg | Getty Images
Peter Navarro, senior economic advisor to 2016 Republican Presidential Nominee Donald Trump last September.

Sensitivity among Germans to spiraling inflation is a long-standing element of the psyche partly due to memories of the uncontrollable and enormously pernicious hyperinflation experienced in the early 1920s. The exchange rate between the former German currency, the mark, and the U.S. dollar soared from 4.1/1 in 1914 to top out at around 4.2 trillion/1 by November 1923.

German Chancellor Angela Merkel on Tuesday emphasized that since its launch, her country's leaders had continuously supported and led calls for the ECB's independence.

"I cannot and do not want to change the situation as it is," she added during a visit to Stockholm.

Merkel's comments came in response to remarks made by Peter Navarro, the head of President Trump's new National Trade Council to the Financial Times earlier in the day, in which he accused Germany of continuing to "exploit other countries in the EU as well as the U.S." with an "implicit Deutsche mark" that is "grossly undervalued".

Navarro cited this as a key impediment to the U.S.'s willingness and ability to view the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the U.S. as a bilateral deal rather than one simultaneously struck with multiple heterogeneous European member states.

Despite support for the German government's claim to a lack of influence in setting its country's currency, Navarro's suggestion that the euro could be undervalued found broader appeal.

Tuesday's release of forecast-beating euro area inflation data at 1.8 percent year-on-year for January showed the measure at its highest level since February 2013.

"The rise in the headline rate, coupled with a strengthening of GDP (gross domestic product) growth to 0.5 percent q/q in Q4, will likely add to calls, mainly from Germany, for the ECB to begin to normalize monetary policy," said RBC analysts in a note to clients on Wednesday, before remarking that as underlying inflation still remained subdued, the ECB should be able to successfully ward off such demands.

Meanwhile, the most recent research from the Organisation for Economic Co-Operation and Development (OECD) found the euro is the most undervalued of all the world's key currencies.

Looking at specific currency levels, there is a rationale for the exchange rate to move from today's level of $1.08 per euro to around $1.25, according to a UBS note from February 1.

"We maintain the view that favorable valuation and growth re-synchronization between the U.S. and euro area should drive EUR/USD higher over the medium term, and we continue to forecast 1.13 at end-2017," began the note.

"Over a longer time horizon we expect EUR/USD to continue rising toward fair value, which we see as being around 1.25. This should be very gradual, however," added the authors of the research.

‘German surplus is colossal’

Navarro, whose comments have been widely interpreted as anattempt to talk down the U.S. dollar in conjunction with recent remarks of asimilar hue by President Trump, does have some supportable basis for hisstatement, John Redwood, chief global strategist at Charles Stanley, told CNBC Wednesday.

"They have a point. The German surplus is colossal. It is causing enormous strains in the euro zone itself which are not helpful. The Greeks and the Italians and the Spaniards are on the wrong end of it," Redwood argued.

"Germany as the strong area with the big surplus has to share that money more willingly with Greece, Spain, Italy and Portugal, otherwise they will have a series of crises and in the end they undermine the very customer base for Germany industry that has driven that surplus in the first place," the global strategist warned.

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