In economic terms, the United States and Germany are two of the luckiest nations on earth. Like two spoiled children, their refusal to appreciate that privilege lies at the root of their trade dispute. 

I’m talking here about currencies. As the issuer of the world’s main reserve currency, the U.S. has for years enjoyed the luxury of living beyond its means. If they were happening anywhere else, the U.S. current account deficits (which reflect an excess of consumption over saving) would have triggered a painful foreign exchange adjustment long ago.

But lacking another large pool of safe assets to buy, international investors and central banks dutifully keep lining up to purchase even more Treasuries, which in turn supports the dollar. President Donald Trump has cut taxes – a stimulus that made the greenback even stronger – and allowed the budget deficit to balloon to $1 trillion. But there’s been little discernible impact on his government’s borrowing costs. The 10-year yield fell as low as 2.23% on Wednesday. “The biggest free lunch in modern economic history,” is how historian Niall Ferguson describes this advantageous and tenacious currency system. For former French president Valery Giscard d’Estaing, it was simply an “exorbitant privilege.”

The dollar’s unique status isn’t just a domestic economic crutch, of course. It lets Washington wield the financial whip overseas, as European companies such as BNP Paribas SA and Siemens AG will attest. Yet Trump shows little appreciation for these benefits and instead appears increasingly vexed about the stubborn strength of the dollar, which some of his acolytes blame for eroding the country’s manufacturing base.(4)

Last week, his administration said countries that subsidized their exports with undervalued currencies should be hit with tariffs. And this week Germany was left on an expanded Treasury Department watchlist of countries worthy of monitoring for currency manipulation, according to the department’s biannual report issued to Congress. The report noted that Germany’s real effective exchange rate is undervalued by 10-20 percent.

Perhaps not coincidentally, Germany sends more exports to the U.S. than any other country and its goods trade surplus with the Americans stands at $68 billion, according to the Treasury. In nominal terms, Germany’s $298 billion overall current account surplus is the world’s largest.

As a member of the single currency, Germany has no direct say in the value of the euro. The European Central Bank’s Mario Draghi doesn’t take orders from Berlin and he targets inflation, not a euro-dollar rate. Furthermore, the weak euro is clearly not the most important driver of German exports to the U.S. Trump has all but admitted that BMW and Mercedes are popular because they’re better.(1)

Still, we shouldn’t ignore the weak euro just because Trump is using it to indulge his protectionist impulses. Nor does membership of the single currency absolve Germany from taking action about its bloated current account surplus. History shows that exchange rates can have a big impact on German exports to the U.S., as well as corporate decisions about whether or not to set up U.S. production. (The supposed dearth of such factories remains one of Trump’s biggest gripes).

Recall, for example, the late 1980s when a strong Deutschmark and devalued dollar forced Porsche to hike the price of vehicles shipped from Germany, whereupon its American sales collapsed. That almost busted the company. Similarly, when the euro surged in 2008 – with the model Gisele Buendchen famously insisting on being paid in euros, not dollars – European manufacturers suddenly became keen to add or expand sites in the U.S. Volkswagen AG announced a new American plant that year, while aircraft manufacture EADS (now know as Airbus SE) described the dollar’s slide as “unbearable” and “life-threatening.” It opened an Alabama factory in 2015.

Today, with one euro buying just $1.12, German exporters are once again laughing all the way to the bank. The same is true of the Berlin government, which makes investors pay it for the honor of borrowing money (10-year bund yields are negative). Whenever there’s a fresh eruption of uncertainty in the euro zone, investors look for safety in German sovereign bonds. However, unlike the U.S., Germany suffers no accompanying appreciation of its currency. The economic historian Adam Tooze has called this “Germany’s exorbitant privilege,” with a nod to Giscard d’Estaing. Some prominent Germans agree.

“Let’s face it, we are benefiting from the monetary policy which most of the people in this country do not want” Friedrich Merz, a conservative politician who has a chance of becoming the next chancellor, admitted last year. He said Germany was “benefiting in international trade – toward China, toward the U.S., toward other regions in the world, from this currency policy.”

Instead of celebrating the bounty of the single currency, though, German policymakers are more likely to complain that its savers are being punished by low interest rates. And rather than take advantage of ultra-cheap borrowing costs to cut taxes and invest more in things like defense, or infrastructure – which might support domestic demand and thus curtail the trade gap – Berlin stubbornly prefers to run a budget surplus. The U.S. Treasury report was pretty scathing about this.

So there we have it: Two countries that don’t appreciate their own manifest economic good fortune and have cause to resent the other’s luck.

An intractable problem? Perhaps not. In the wake of a dispute with the U.S. about sanctions on Iran, Germany has become more receptive to the need for greater economic sovereignty. At the same time, the European Union has been more vocal about making the euro a viable alternative reserve currency to the dollar.(2)

No doubt this will remain a pipe dream. Germany remains opposed to eurobonds, which would provide a larger pool of safe assets that are an essential prerequisite for a reserve currency. And with Italian and French populists bristling at fiscal constraints, the euro is hardly a bastion of stability.

Still, if in time the euro did become more of a rival to the dollar, it might alleviate some of the upward pressure on the greenback, thereby spurring U.S. exports and encouraging German manufacturers to shift even more production to the U.S. (In fairness, BMW AG and Daimler AG already have quite a lot, although Trump ignores this).

To reduce the U.S. trade deficit, the Trump administration should “encourage the adoption of other major currencies, such as the euro, yen, or renminbi, as alternative reserve currencies,” according to Caroline Freund at the Peterson Institute for International Economics.(3)

Of course, if the euro really were to compete with the dollar, its strength would make Europe’s exports less competitive, a point Adam Tooze and Christian Odendahl raise in this Centre for European Reform essay.

Meanwhile, diminished demand for dollar assets might make it harder for the U.S. to run massive budget deficits. I suspect neither side really wants to give up these advantages, so don’t bet on it happening in a hurry. For now, the U.S. and Germany should stop trying to have their cake and eat it, and learn to live with their choices.   

(1) Ben Bernanke has also reflected that the “exorbitant privilege is not so exorbitant any more.”

(2) Here’s a German government paper outlining why it thinks its current account surpluses aren’t really a problem.

(3) See also this speech for an idea of what the ECB thinks.

(4) See also this paper by Willem Thorbecke.

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Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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