President Trump’s top trade adviser said Germany was using a “grossly undervalued” euro to “exploit” its trading partners in Europe and the United States, comments that triggered a spike in the euro's value to a one-week high.
Trump's tough campaign rhetoric regarding trade has long fueled speculation of tensions with China and Mexico, countries that export large volumes of cheap goods to the United States. But Navarro's aggressive statements against Germany and the European Union appear to have taken markets and European leaders by surprise.
Navarro’s comments appear to reflect a deep antipathy on the part of the Trump administration to multilateral trade deals and institutions, an attitude that has unsettled U.S. allies in Europe and around the globe in recent weeks.
On Jan. 23, his first full working day in office, Trump declared his intention to withdraw from the Trans-Pacific Partnership, an Obama-era trade deal that Trump claimed would kill American manufacturing jobs. During the campaign, Trump also announced his intention to renegotiate the U.S. free trade deal with Canada and Mexico, and called the primary military alliance between Europe and the U.S. “obsolete.”
In his comments, Navarro cited Germany as a main obstacle to a proposed U.S.-E.U. trade deal called the Transatlantic Trade and Investment Partnership, or TTIP. “A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the E.U. as well as the U.S. with an ‘implicit Deutsche Mark’ that is grossly undervalued,” he said.
Angela Merkel responded Tuesday by saying that Germany does not influence the value of the euro and supports an independent European Central Bank.
Navarro’s comments about TTIP appeared to stem from his preference for bilateral trade deals, which he, Trump and other advisers believe give the U.S. more leverage in trade negotiations.
"I personally view TTIP as a multilateral deal with many countries under one ‘roof’,'" said Navarro. "The German structural imbalance in trade with the rest of the E.U. and the U.S. underscores the economic heterogeneity within the E.U. — ergo, this is a multilateral deal in bilateral dress.”
The United States and other European countries have long criticized Germany for its trade deficit, though typically in subtler and more diplomatic tones.
Economists say that Germany's position as a strong exporter in a currency union made up of weaker economies has boosted Germany's exports and exacerbated its trade deficit. The shared euro effectively results in Germany having a weaker currency than it otherwise would, making its exports relatively cheap on the world market. Meanwhile, net importers like France, Greece and Portugal end up with a stronger currency.
That dynamic has fueled exports by German firms like BMW and Siemens and resulted in a German current account surplus that is larger even than China's in absolute terms.
"I think [Navarro] has a point, in that Germany has basically set up the rules in the euro area to suit itself, and if they hadn’t been a euro area, the German currency, the Deutsche Mark, would be much stronger now, and that would hurt their exports," said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. "They have basically tied themselves down by the weak partners in the euro area. And they’ve forced Italy, Spain and Portugal to do massive fiscal austerity, and that caused big recessions which killed their imports."
In addition, some economists say diverging monetary policy between the European Union and the United States is strengthening the dollar and weighing on American exports. In January, the euro fell to its lowest value against the dollar in 14 years.
In recent years, gathering economic strength and falling unemployment in the United States has allowed the Federal Reserve to start tapering off purchases made under its massive bond buying program known as quantitative easing and begin gradually lifting U.S. interest rates. In the European Union, in contrast, the European Central Bank has continued quantitative easing and held interest rates low, as many economies around the periphery are still mired in recession.
The difference in interest rates and inflation expectations between the U.S. and the E.U. has coaxed international investment to the U.S., strengthening the value of the dollar against the euro.
Indeed, some economists argue that monetary and fiscal policy in the European Union has still been too tight to put struggling countries like Greece back on track. But Germany, a traditional advocate of austerity and low inflation, has generally disagreed.
"I’m on the record being critical of Germany’s euro policy, but Merkel is not wrong. Germany does not control the exchange rate. Neither does the ECB," said Matthias Matthijs, a professor of international political economy at Johns Hopkins School of Advanced International Studies. "In many ways, the weaker euro is a consequence of the ECB’s quantitative easing policies, and these are policies that both the Fed and Japan’s central bank have implemented."
Though growth overall remains sluggish in the euro zone, there are signs that the economy is changing, with inflation picking up in Germany in recent months. However, Britain's exit from the European Union, as well as upcoming elections in France and the Netherlands that could affect the E.U.’s course, could potentially destabilize the European economy in the future.
In emailed comments to the Financial Times, Navarro also blamed the failure of the proposed trade deal between the United States and Europe on Britain’s decision to leave the European Union. “Brexit killed TTIP on both sides of the Atlantic even before the election of Donald Trump," Navarro wrote.
Trump has generally been favorable of Brexit, telling British press ahead of his inauguration that the move is “a great thing” and that other states will likely follow Britain out the door. “I do think keeping it together is not gonna be as easy as a lot of people think,” Trump said.
Last week, Ted Malloch, a businessman who some expect to be Trump’s pick for E.U. ambassador, said he would “short the euro” and that Brexit could cause the currency to “collapse” in the next year and a half.
Matthijs said he believes Navarro and the administration see a weaker Europe as "in their interest because they can do bilateral deals."
"If you do a trade deal with Europe, you’re dealing with an equal. Which is not the case in foreign policy or defense, but it is the case in trade," he said. "If that’s your view, that that’s bad, you need to divide and rule."