Writing for Project Syndicate, economist Fabrizzio Coricelli takes on the perennial issue Germany’s trade surplus. Long a simmering issue in Europe, the surplus has recently been criticized sharply by President Trump.

Coricelli reviews the usual suspects: high savings rate, productive workers, and chronically tight fiscal policy. He concludes that all play a role. However, he dismisses as “bizarre” the claim that Germany engages in currency manipulation, since it does not have its own currency.

But Coricelli is not entirely correct. Although Germany does not have its own nominal exchange rate, it is possible to calculate its real effective exchange rate (REER) separately from that of the euro. A country’s REER is its exchange rate, weighted by the share of trade to each trading partner, and adjusted both for movements in nominal rates vs. other currencies and for changes in rates of inflation (methodology here). The following is a chart of real effective exchange rates for the United States, Germany, and the euro since 2000.


Two things stand out in this chart.

First, from 2002 to 2014, the REER of the euro was persistently strong relative to the dollar. By itself, that reduced the competitiveness of exports from all Eurozone countries, Germany included, relative to that of exports from the United States. Since 2014, however, the dollar has appreciated sharply against the euro, so that the relationship of the REER’s of the U.S. and EZ are now close to where they were 2000.

Second, we see that throughout the period, Germany’s own REER has tracked well below that of the EZ as a whole. That must be attributed to lower inflation, since Germany has the same nominal exchange rate as all other EZ countries. In that sense, it is fair, after all, to attribute a significant part of the German trade surplus to exchange rates.

Is it currency manipulation? Not in the classic sense, but, as I argued in this earlier post, the structure of the Eurozone does allow Germany to play a persistent free rider role when it comes to trade.